The famous video game platform based in San Mateo, Calif., Roblox (RBLX), is considered a play on the emerging metaverse, a next-generation version of the internet. Is it advisable to invest in Roblox stock in the current stock market rally?
After the closing on Tuesday, Roblox released its fourth-quarter earnings results, failing to meet Wall Street’s estimates. The company incurred a loss of 25 cents per share on bookings of $770.1 million in the December quarter.
According to FactSet, analysts had predicted that Roblox would incur a loss of 12 cents per share on bookings of $772 million.
Early Wednesday, there was a substantial decrease in Roblox stock by more than 27%, trading at $53.50. RBLX shares reached an all-time low on Feb. 16, dropping to as low as $53.08.
Is Roblox Stock Worth Buying?
At first glance, Roblox appears to be an expensively priced company – possibly even grossly overvalued if you are incredibly pessimistic.
Its forward P/E ratio is a staggering 112.07, and its forward Price/Sales multiple currently stands at 20.67 – a high number considering that the sector median is just 1.86.
However, Roblox’s story is more nuanced than most others, and you have to consider the company’s history when trying to evaluate its business.
For instance, the company isn’t young – it has been around for nearly 15 years – and many investors might assume that the company is still in its growth phase; yet, for all practical purposes, it is.
It wasn’t until the COVID-induced lockdowns of 2020 – when younger children had limited ways of communicating with their friends outside of their households – that Roblox took off. The potential of the platform to become a hybrid gaming/social network only then became apparent, a potential reflected in the company’s surging user base and engagement hours.
Indeed, this fusion of a gaming platform with a tool for socializing is what gives Roblox its business moat. Yes, other applications excel in their respective fields – YouTube for video streaming, Steam for game distribution – but no one is creating the immersive ecosystem that Roblox is building.
Roblox Growth Valuation
The company missed its EPS expectations, but this was the only negative aspect.
Other positive financial metrics of note were the company’s total revenues of $387.0 million, up 140% year-on-year; its bookings, up 161% at $652.3 million; and its second-best free cash flow ever of $142.1 million.
However, Roblox’s critical operating metrics were more significant than the raw financial figures. Two of the most important are its Daily Active Users (DAUs) and Hours Engaged. And on both these barometers of operational health, Roblox posted record numbers: 42.1 million DAUs and 9,674 million Hours Engaged.
But so much for past performance. The question now is, where is Roblox heading? The problem here seems to be user retention, and because the platform’s typical user still appears to be under 16 years of age, it isn’t clear just yet whether these players will stick around.
Also problematic is the fact that Roblox is heavily reliant on app stores to download its platform. This model is highly vulnerable to competition pressure and the app stores’ future policies.
Is Roblox Stock A Good Investment?
The concern with a company like Roblox is whether its “overnight” success is just a one-time, fleeting stroke of luck; or does it stem from that elusive golden catalyst that the business has been waiting for all these years?
Following on from that, can its success be replicated going forward?
This will probably only be answered after the next couple of quarterly results come out.
But for now, given that Roblox trades at a near 30% premium from its IPO price, it might be wise to sit this one out and wait and see what happens.
