Every time I write about Skillz (NYSE:SKLZ) I realize that analysts keep lowering their sales projections for the gaming company. Actually, it’s a software company that helps developers make their own games. Maybe after the company announces its third-quarter earnings on Nov. 3, SKLZ stock can turn around.

As of Oct. 27, the stock was at $11.09. But it started the year at $20, so that’s down $8.91 or 44.55% year-to-date (YTD). And that is after it closed at $43.72 on Feb. 5, only to tumble down to a recent low of $8.05 as of Oct. 11.

The roller coaster ride has subdued a bit, as SKLZ stock has drifted up about 44% to $11.63.

I believe if its Q3 revenue and earnings come in better than expected, there is a slight possibility, however slim if marketing expenses are under control, that SKLZ stock could begin a rebound.

Where Things Stand With Skillz

Skillz operates an online-hosted platform that “enables independent game developers to host tournaments and provide competitive gaming activity to end-users worldwide.” In effect, they get paid by offering developers an SDK (software development kit) that manages competitions and prizes paid out to consumers in the games. Skillz charges a percentage of the gaming company’s revenue of the entry fees into the competitions and games.

In effect, they manage the games, collect the entry fees from end-users of the game using the end user’s credit cards or PayPal (NASADQ:PYPL) accounts.

This way, Skillz acts sort of like a casino manager on behalf of the game developers. It pays out the prizes and keeps a portion of the entry fees for its portion of the revenue share before paying the game developer for its portion of the entry fees.

So you can see that the company’s fortunes depend on how well game developers can promote their games. Skillz also has to spend a lot of marketing money to drive traffic to its game developer platform. Sometimes, for example, it offers Bonus Cash to initial end users to the game developers’ sites.

This is a marketing expense. There are other promotions that the company has to spend money on to drive traffic, which the company calls “End User Incentive Programs” on page 7 of the 10-Q.

How This Affects Skillz’ Profits

In Q2 Skillz spent $99.5 million in “Sales and Marketing” in order to make just $89.5 million in revenue. So, you can see the problem. Its business model is inherently unprofitable, at least until marketing expenses can be held level as sales rise.

The problem is promotional and traffic pushing expenses exceed sales. You can also see this in the first six months’ sales and marketing expenses. Revenue was $173.1 million, but sales and marketing expenses were $195.8 million.

This is essentially why the company cannot produce positive free cash flow. As a result, I am changing my mind about the company and SKLZ stock. I don’t see a situation where the company will turn unless revenue dramatically increases.

However, analysts have been lowering their sales estimates. For example, Seeking Alpha has a page that shows that in the past six months sales forecasts for the year ending December 2022 have fallen 2.7%. That is going in the opposite direction that they need to be.

What to do With SKLZ Stock

Analysts will be looking at the Q3 earnings release on Nov. 3 very carefully. They will want to see if the company’s marketing and sales expenses exceed sales. If not, then going forward Skillz has a chance at making a profit and free cash flow.

But if not, then SKLZ stock will not fly higher for quite some time. As a result, patient investors will take care to analyze the company’s financials before investing in this stock.

On the date of publication, Mark R. Hake did not hold a position, directly or indirectly, in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.