Skillz (NYSE:SKLZ) reported Q2 2021 results on Aug. 3. Since those results, SKLZ stock has lost more than 20% of its value. Its shares now trade under $11, perilously close to single digits. 

Despite strong top-line results in the second quarter, investors chose to focus on the bottom line, or lack thereof. Unfortunately, Mr. Market can be a terribly finicky sort. 

In a recent commentary, I’ve continued to hammer on the idea that SKLZ stock is a buy under $15. I said as much on July 30.

It’s now well below $15, so I’m left wondering if things are ever going to get turned around. 

As falling knives go, Skillz continues to fill the bill, leaving me at a loss for words. 

It seems biotechs can do no wrong right now. Companies like Cassava Sciences (NASDAQ:SAVA) can lose boatloads of money, have no sales in the foreseeable future and investors pile into its stock. 

Meanwhile, as InvestorPlace’s David Moadel pointed out in mid-August, Skillz delivered a sales record for the quarter, a 95% gross margin and a 47% increase in GMV (gross marketplace volume). 

A trifecta of growth. 

The fact that it lost 21 cents in the quarter (10 cents worse than the consensus estimate) has investors worried that it will never be able to reign in its operating expenses. Costs ballooned by 95% year-over-year. 

SKLZ Stock and Future Profits

I get being skittish about its future. It’s never good when your expenses are growing faster than your sales.

In the second quarter, for every dollar in sales, Skillz had operating expenses of $1.51. So, it’s spending 50% more than it’s generating in sales. That’s up from $1.16 in Q2 2020. 

When does the scaling up come to an end? That I can’t tell you.

I know that the company expects 2021 sales of $389 million, 69% higher than in 2020. This means the company believes that it will continue to grow at the same rate as the first half of 2021. 

Now, assuming $1.51 in operating expenses per dollar in sales and a 95% gross margin in 2021, it ought to lose $188.47 million [$389 million multiplied by 95% multiplied by $1.51].

That’s a loss of 64 cents a share [294.5 million shares outstanding], or 52% higher than in 2020.   

However, it had no debt and almost $700 million in cash on its balance sheet at the end of June.

Based on a loss of $133 million through Q2, it will lose another $55 million in the second half. Then, in 2022, up the loss to $286 million [52% higher YOY]. That leaves it with $352 million in cash, almost enough to withstand a 52% increase in losses in 2023. 

It Ought To Turn the Corner Before 2023

In the September 2020 merger presentation, page 31 estimates its 2022 revenue at $555 million. Assuming Skillz hits $389 million in 2021, that’s 43% growth in 2022 to hit its estimate. 

If it continues to grow at 69%, though, it will get to a billion dollars in sales by the end of 2023. That’s almost $300 million ahead [$555 million multiplied 42% growth] of where it expected to be according to its merger presentation. 

From where I sit, that’s an excellent thing. I find it hard to believe that it won’t be able to cut the expenses-to-sales ratio from 1.51 over the next 30 months. 

For this reason, I also find it hard to believe that SKLZ is only worth $4.36 billion, while Cassava Sciences was worth the same amount up until its 31% drop in share price on Aug. 25.

It seems absurd that a money-losing company with $389 million in expected 2021 revenue should be worth a lot more than a company with no revenue and lots of losses.

I know it’s an apples-to-oranges comparison, but it’s frustrating nonetheless.     

If you’re an existing shareholder and can afford to lose 100% of your investment, I would seriously consider buying more SkLZ stock under $11. I thought it was a buy under $15. I still think it’s a buy.

But only for aggressive investors. This isn’t one for your retirement portfolio.   

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.