Skillz Inc. (NYSE:SKLZ) Stock Rockets 35% As Investors Are Less Pessimistic Than Expected

Skillz Inc. (NYSE:SKLZ) shareholders would be excited to see that the share price has had a great month, posting a 35% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 24% is also fairly reasonable.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Skillz's P/S ratio of 1.1x, since the median price-to-sales (or "P/S") ratio for the Entertainment industry in the United States is also close to 1.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Skillz

What Does Skillz's Recent Performance Look Like?

While the industry has experienced revenue growth lately, Skillz's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting its poor revenue performance to improve, keeping the P/S from dropping. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Skillz will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The P/S?

In order to justify its P/S ratio, Skillz would need to produce growth that's similar to the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 37%. As a result, revenue from three years ago have also fallen 69% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 4.4% each year as estimated by the four analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 11% per year, which is noticeably more attractive.

With this information, we find it interesting that Skillz is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Final Word

Skillz's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our look at the analysts forecasts of Skillz's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Skillz (at least 1 which is a bit unpleasant), and understanding these should be part of your investment process.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.