What Happened:

Shares of mobile game developer Skillz (NYSE:SKLZ) fell 10.9% in the afternoon session after the company reported first-quarter results that missed analysts' revenue and EPS estimates. Its number of users declined, and its revenue growth was quite weak. Gross margin also fell, while free cash flow stayed negative. Overall, this was a mediocre quarter for Skillz.

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What is the market telling us:

Skillz's shares are very volatile and over the last year have had 72 moves greater than 5%. But moves this big are very rare even for Skillz and that is indicating to us that this news had a significant impact on the market's perception of the business. 

The biggest move we wrote about over the last year was 11 months ago, when the stock dropped 18.8% on the news that the company announced that it would execute a 1-for-20 reverse stock split of its Class A and Class B shares. The move will reduce the number of outstanding shares and increase the share price, but will not change the company's market value or fundamentals. However, reverse stock splits often lead to negative market reactions as they are often executed when a stock's per share price falls under certain thresholds such as $10 or $1. While the reverse split does not change anything from a fundamental standpoint, the path to a stock trading below $10 or $1 is often a sign of business weakness or market pessimism. As a result of the reverse stock split, every 20 shares of Skillz issued and outstanding common stock will be converted automatically into one issued and outstanding share of common stock. If you owned 1,000 shares at a price of $0.50, for example, the reverse split would result in owning 50 shares at $10 (both $500 in value). The reverse stock split will become effective on June 23, 2023, and the Class A shares will start trading at the new price on June 26, 2023.

Skillz is down 2.2% since the beginning of the year, and at $5.71 per share it is trading 59.2% below its 52-week high of $14 from June 2023. Investors who bought $1,000 worth of Skillz's shares at the IPO in April 2020 would now be looking at an investment worth $28.84.

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