What Happened:

Shares of mobile game developer Skillz (NYSE:SKLZ) fell 18.8% in the pre-market session after 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.

What is the market telling us:

Skillz's shares are very volatile and over the last year have had 97 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 previous big move was three months ago, when the stock dropped 5.94% on the news that the company delivered disappointing results for both revenue and earnings in the first quarter. In addition, its paying monthly active users dropped to 214 thousand, down 61% compared to the previous year.

Skillz is up 2.18% since the beginning of the year, but at $0.52 per share it is still trading 73.8% below its 52-week high of $1.98 from August 2022. Investors who bought $1,000 worth of Skillz's shares at the IPO in April 2020 would now be looking at an investment worth $52.63.

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