San Mateo, Calif.-based Roblox (RBLX) is a famous video game platform regarded as a play on the emerging metaverse, a next-generation version of the internet. Is Roblox stock a buy in the current stock market rally?
After the close Tuesday, Roblox reported its fourth-quarter earnings results, missing Wall Street’s estimates. The company lost 25 cents a share on bookings of $770.1 million in the December quarter.
According to FactSet, analysts had expected Roblox to lose 12 cents a share on bookings of $772 million.
Early Wednesday, Roblox stock crashed more than 27% to trade at l53.50. RBLX shares hit an all-time low on Feb. 16, trading as low as 53.08.
Is Roblox Stock A Buy?
At first glimpse, Roblox seems to be an expensively priced company – possibly even grossly overvalued if you are incredibly pessimistic.
Its forward P/E ratio is an eye-watering 112.07, and its forward Price/Sales multiple currently stands at 20.67 – a high number when you consider that the sector median is just 1.86.
But Roblox’s story is more nuanced than most others, and you have to consider the firm’s history when attempting a valuation of its business.
For example, the company isn’t young – it’s been around now for going on 15 years – and many investors might start at the idea that the firm is still in its growth phase; and yet, for all intents and purposes, it is.
Because it wasn’t until the COVID-induced lock-downs 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 are the best at their own thing – YouTube for video streaming, Steam for games distribution – but no one is creating the immersive ecosystem that Roblox is building.
Roblox Growth Valuation
The company missed on its EPS expectations, but this was the only negative thing to come out of it.
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 issue with a company like Roblox is whether its “overnight” success is just a one-time, transient 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.