What Happened:

Shares of mobile game developer Skillz (NYSE:SKLZ) fell 6.9% in the morning session after the company reported fourth-quarter results with revenue missing analysts' expectations. The company's user base fell and its revenue growth was quite weak in the quarter. Paying monthly active users fell significantly during the quarter (-41% year on year), falling below expectations. Monetization was also weak as average revenue per paying monthly active users also came in below analyst estimates. 

However, the bright spot was management saying that Skillz will achieve "positive Adjusted EBITDA on a run-rate basis by the fourth quarter of this year", which is above expectations of roughly breakeven by that time. Skillz also called out its efforts to improve the weak growth trend, adding, "Importantly, after declines in our paying audience throughout 2023, We significantly slowed the decline at the beginning of 2024." Overall, the results were weak and highlighted a lot of challenges that are likely to raise concerns among investors.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Skillz? Access our full analysis report here, it's free.

What is the market telling us:

Skillz's shares are very volatile and over the last year have had 84 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The biggest move we wrote about over the last year was 9 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). 

Skillz is up 3.8% since the beginning of the year, but at $6.05 per share it is still trading 59.9% below its 52-week high of $15.08 from April 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 $30.61.

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