When Skillz (NASDAQ:SKLZ) closed at a 52-week low last week, it discouraged investors from seeking exposure to the sports betting and iGaming market. SKLZ stock is faring worse than fuboTV (NYSE:FUBO), which is also entering the sports betting market.

Still, Skillz is not the only company facing selling pressure. DraftKings (NASDAQ:DKNG) is six times larger than Skillz by market capitalization. Its stock is down, trading well below the 200-day moving average.

Why is Skillz performing the worst?

Esports Would Lift SKLZ Stock

Chief Executive Officer Andrew Paradise said that the company believed nine years ago that esports is for everyone. Skillz wants to make it as fair and as accessible. It will start by enabling developers of any size to monetize their work.

The company’s first step for growth in this space is growing its user base. Though they start as a free user, their long-term value increases. Paradise characterized the esports mindset as people who love sports all their life. For example, people who love skiing may sky less as they get older. Yet they will keep spending more money over time while skiing less. The company is applying this loan-to-value return on its platform. It needs to acquire more users first.

Skillz accelerated the user base growth by acquiring Aarki, an AI-enabled mobile marketing platform. This added around 200 million users. Yet it also cost Skillz $150 million. Nasdaq’s underperformance undermines investor confidence for companies that acquire. Skillz will get only $13 million in Aarki revenue this year. It still needs a few quarters to fully integrated Aarki and realize the potential synergies.

Platform Development

Skillz will use Aarki’s data with its proprietary data to create a better data value chain. For example, this will lead to better ad impressions for the end-user over time. The company expects user acquisition costs will fall, thanks to Aarki. Paradise gave four to eight quarters for the integration work to pay off. After the stock fell, investors are expressing skepticism over that already long timeline.

New content on the platform, brand distribution partnerships, like Skillz has with the NFL, or expansion in new markets will increase the platform’s value. To increase user engagement, Skillz bought Exit for $50 million. This added multiplayer synchronous features to its platform. The company wants to accelerate its development in hardcore gaming genres. For example, first-person shooter, racing, and fighting games are the types of games that will get platform exclusivity for Exit’s technology.

Alternative Investments

Markets cooled on gaming companies. Activision (NASDAQ:ATVI) is on a downtrend. Zynga (NASDAQ:ZNGA), another mobile gaming firm, is trading at close to 52-week lows. Both stocks are alternatives to investing in Skillz. Value investors may buy Activision, betting that the company will resolve its internal work culture problems.

Zynga’s expensive acquisitions are spooking investors. If the firm proves that its $525 million acquisition of StarLark, a Chinese game developer, ZNGA stock will rebound. Still, the valuation of many Chinese firms is questionable. Investors are avoiding the region due to the sudden shift in tighter regulations.

Skillz does not have the same geographical risks as Zynga.

Fair Value

In a five-year discounted cash flow EBITDA exit model, readers may assume a generous terminal EBITDA multiple of 40.1 times. This implies a fair value of $9.59:

Model courtesy of finbox

Skillz will need to continue reporting revenue growing at over 50% on average to justify that fair value.

Risks

Bearish investors have a substantial short float of over 20% against SKLZ stock. With the stock falling steadily, markets are betting that Q3 results will disappoint investors. Skillz will need to exceed investor expectations to overcome bears. It must also report strong monthly active users from titles like Trivia Crack and Big Buck Hunter. The latter title has a $5,000 competition, which uses Skillz’s real-money gaming features. This will draw over 20,000 players who are competing for the chance to win the prize.

Your Takeaway on SKLZ Stock

Bears are in full control with SKLZ stock. Every rally is short-lived and follows with steady selling. The firm is unlikely to post impressive quarterly results next month. Even if it does, risks are high that the company will report challenges in its acquisitions. It may face integration delays or costs cuts that are behind schedule.

As the technology market turns bearish, Skillz cannot afford to disappoint investors.

On the date of publication, Chris Lau 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.