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Why Roblox Stock Dropped Thursday

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

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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 videogameschronicle.com 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.

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