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Is Roblox Stock Too Expensive?

By Matthew Frankel, CFP® and Brian Feroldi - Mar 25, 2021 at 10:24AM

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This isn't a cheap stock, but could it still be worth a look?

Roblox (RBLX 6.87%), maker of popular mobile gaming software, recently went public through a direct listing, and the stock has been an excellent performer in its first few weeks on the public markets. But like many high-growth tech companies, Roblox isn't a cheap stock by any definition of the word. In this Fool Live video clip, recorded on March 11, contributors Matt Frankel, CFP, and Brian Feroldi discuss Roblox's high valuation and why the stock might be worth a look anyway.

Matthew Frankel: This is not a cheap stock, which you would expect from a company growing at a rate like this. Just looking at its revenue from the past year and its market cap after this very successful direct listing, Roblox is trading at about 50 times sales. But the big asterisk there is, as Brian said, bookings are about twice what their sales are for the past year. Bookings are the revenue that they've taken it, but really hasn't been spent on the platform yet, like gift cards. So when you look at it at a price-to-bookings rate, it's a much more palatable 25. Still a high multiple for a company growing at an 80% year-over-year rate and expecting 60% growth this coming year. That's not that unreasonable when you think about it. Again, Roblox is not profitable. They lost about a quarter-billion dollars last year. But when you're growing at rates like that, no one cares. Growth costs money. That's a big lesson for investors to know in stocks like Roblox and all these other big growth names that we've talked about. Now, the risks are another issue, and I want to get Brian's input on one of these things. But just in general, IPOs are very volatile. Roblox went public and started trading to the public less than 24 hours ago. Since that time, it's traded in a range of $60.50 to $77.78 in less than 24 hours as a public company. Expect volatility. This is a growth stock, the long term, that's not a risk factor that as much, if you think it's a great long-term thesis, you don't care what it's doing today, but expect some short-term volatility. My biggest question mark is what happens after schools are back to five day a week learning and kids aren't at home playing on their tablets and smartphones anymore. As Brian is a parent of kids who love this product, what do you think is going to happen after the pandemic? I see a question on the chat about that. That's a good one I wanted to bring up.

Brian Feroldi: I don't know. I can tell you that my kids liked playing video games before the pandemic, they liked playing throughout it, and I guarantee they're going to like playing video games after the pandemic is over. As I said, my girls this morning, they were just on Roblox with each other, walking around each other's world talking. They also connect with their friends on there. That is not a concern for me. I mean, will engagement fall? I mean, sure. It's not going to be at the same levels that it is, but there's still 32 million people that joined Roblox for the first time, and there's a lot of social benefits to them sticking around. The question that I want to know more about is: How successful is the company going to be with maintaining those users as they age? I don't know if three years from now, my girls will be interested in playing Roblox anymore. Now, what my kids do is irrelevant. It's what the entire Roblox user base does, it's a mistake, I've learned, to say, "Well, here's what I'm doing in my life, therefore, everybody else is making the same decisions that I am." But I will tell you, I'm going to buy the stock next week. I'm going to buy one share of Roblox for each of my kids, and we're either going to make money or we're going to learn something.

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