Please ensure Javascript is enabled for purposes of website accessibility

Why Roblox Stock Dropped Thursday

By Rich Smith - May 13, 2021 at 5:05PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Worries over rising competition and slowing growth dent Roblox stock.

What happened

Roblox Corporation (RBLX -5.52%) shares plunged in Thursday trading to close the day down 7.8%. This was the second day in a row of prices falling since the company reported blockbuster sales growth in its first earnings report post-IPO.

So what

Two factors appear to be contributing to the declines. First: Competition.

As reported late Tuesday (perhaps not coincidentally, just hours after the earnings report that sent Roblox stock flying), video game producer Ubisoft is shifting its business model away from relying solely on sales of high-price "AAA releases" and evolving to offer a "high-quality line-up that is increasingly diverse," including "building high-end free-to-play games."

Glowing red stock chart arrow trending down

Image source: Getty Images.

Free-to-play gaming (plus in-game sales for a price) is, of course, Roblox's forte. Investors may see competition from Ubisoft in this arena as a reason to question Roblox's growth prospects.

At the same time, a midday report out of investment bank Stifel Nicolaus yesterday, in which the analyst raised its price target on Roblox but warned of "decelerating" growth in April "that we'd anticipate continuing into the 2H as the biz laps difficult comps," may also be weighing on the stock. 

Now what

Even if Roblox's growth rate is decelerating, it's got a long way to go before anyone could call it "slow." In Q1 2021, the company says it grew revenues 140% and bookings (i.e. sales of Robux) by 161% -- which actually might imply that sales growth is still accelerating at this point.

Moreover, it's worth pointing out that on the company's cash flow statement, Roblox translated $387 million in sales into $142.2 million in positive free cash flow (FCF) in Q1. That works out to a free cash flow margin of 36.7% -- below the roughly 50% margin the company boasted heading into its IPO but superior to the 21.4% FCF margin Roblox booked a year ago in Q1 2020.

With sales growth still strong and free cash flow margins arguably improving, Roblox investors might want to look at today's sell-off as a buying opportunity.

Rich Smith owns shares of Roblox Corporation. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Roblox Corporation Stock Quote
Roblox Corporation
$46.26 (-5.52%) $-2.70

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/16/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.