Why Skillz Plunged 35.2% In July | Nasdaq

What happened

Shares of Skillz (NYSE: SKLZ) plummeted 35.2% in July, weighed down by doubts raised from stock-shorting hedge funds, the availability of warrants that will dilute existing shareholders' stock, and investment management favorite Cathie Wood dumping a large tranche of shares.

All of that was occurring as the mobile esports platform headed toward an Aug. 3 earnings-release date that would also weigh on Skillz shares.

Image source: Getty Images.

So what

Earlier this year, two negative reports were issued alleging Skillz management concealed the fact that revenue from its three most important games -- Blitz, Solitaire Cube, Blackout Bingo -- had plummeted. (These games account for almost 90% of the company's revenue.) The reports also claim that money Skillz gave to players as game "bonuses (which they would spend in the game) counted toward its revenue. Skillz is now facing dozens of shareholder lawsuits seeking to become a class action suit.

Wood, however, refuted one of the charges and bought large amounts of Skillz stock to show her support, and Motley Fool contributor Jon Quast addressed the other. Both suggest the concerns are overwrought, but they remain clouds over the company.

Skillz also issued warrants to the special purpose acquisition company (SPAC) that took it public. With its stock remaining above $20 a share for a specified period of time, those warrants could be exercised at a discount to where Skillz was trading. Although oftentimes warrants are not exercised (Skillz's expire on Aug. 16), they still represent dilution existing shareholders face.

Despite Wood's earlier show of support, she sold a portion of her holdings, suggesting she could find a better spot for her money given the continued downward spiral in the company's stock. Shares have lost nearly three-quarters of their value from their February highs. Even so, Wood's Ark Innovation ETF still owns almost 13.7 million shares, and her Ark Next Generation Internet ETF owns 6.6 million shares.

Now what

Esports is a massive growth opportunity, and Skillz is looking to capture a good portion of it. Because its platform is neutral about what games can be played on it, Skillz is able to welcome all comers. It's still a money-losing operation, but it has no debt and ended the most recent quarter with plenty of cash in the coffers, providing gamers and itself a platform for future growth.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Skillz Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.