Roblox (RBLX 2.10%) shows robust growth in its first report as a public company. Callaway Golf (MODG -1.39%) closes in on an all-time high as it deals with "unprecedented" demand for golf equipment and apparel. In this episode of MarketFoolery, Motley Fool analyst Jason Moser analyzes those stories but first discusses the recent sell-off in the market and how investors can deal with it.

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This video was recorded on May 11, 2021.

Chris Hill: It's Tuesday, May 11th. Welcome to MarketFoolery. I'm Chris Hill. If you've been listening for a long time, you know that at least a couple of times a year I remind you, the dozens of listeners, that the people who come on this show, it's not their job to come on this show. They have other jobs at The Motley Fool. They're busy and they're helping me up by coming on this show. Every once in a while, like today, for example, someone says, "Yeah, I'll come on MarketFoolery." Then, I don't know, an hour before we're about to record, the person says, "Hey, you know what, I have a work emergency. I can't do the show." I say, "That's fine, you know why? Because it's not your job to come on the show." In situations like that, I turn to the Cal Ripken Jr. of MarketFoolery. Jason Moser, second day in a row. Thanks for pinch-hitting.

Jason Moser: Wow, I don't think I can live up to that expectation, but I'm going to try my darndest.

Hill: We're going to talk about some earnings in the news. But before we do that, let's talk about the sell-off that is happening in the market, because now it's getting to the point where I think back to what was it eight days ago, where it was the first trading day of May, and one of the things you and I talked about was the whole sell in May and go away, and what a bunch of garbage that is. I don't know about you, but I certainly looked at the NASDAQ part of my portfolio, and I thought to myself, "Maybe I should have just sold in May. Maybe I should have." This is one of those times when the market timers are having a laugh at the expense of long-time buy-and-hold investors like you and me.

Moser: Yeah. You and I, we've been investing long enough. We know we're going to go ahead and let those timers have their moment in the sun, because it's not going to last forever. Nothing really does, but certainly, we have plenty of track records across our Foolish universe that demonstrate the efficacy of long-term investing, buying to hold for very long periods of time. It's not just one of those lazy bromides that we espouse every show, it really does work. That's why we just reiterated because it matters. To your point there in regard to the NASDAQ, yeah, it's putting some thoughts together this morning for one of my services here at work, and it was all centered around what's been going on in the market lately in regard specifically to the NASDAQ. I'm glad you brought that up, because if you look at the way the NASDAQ has performed over the last several years versus what's been going on recently, it starts to become a little bit more clear, at least, how exposure to the NASDAQ could be impacting your portfolio. 

If you look at the last five years, if you look at returns over the last five years, The NASDAQ has close to double the S&P. I mean, you're looking at around 98% return for the S&P versus 176% or so for the NASDAQ. That's actually not even total returns, so we could even expect those numbers to go up. But the point is that over the last five years, the NASDAQ has really outperformed the S&P considerably. Now, if you zoom in actually, and look a little bit closer at say the last three months, the S&P up just close to 6%, and the NASDAQ down close to 5%. So we've seen a lot of selling on NASDAQ held stocks and that is obviously NASDAQ is a very tech-heavy index, so that does make sense. We are living in the day and age of 40 times sales being like the new normal, but we've also been beating our heads against that brick wall. It seems for a long time that this 40 times sales cannot be the new normal. At some point this has to fix itself. Maybe that is to a certain degree. 

I think though, for us as investors, you just have to remember that while it never feels good watching our stocks go down, it's the price of admission. It's not a matter of if, it's a matter of when, and you have to accept that. If you can't accept that, if you can't deal with it, then you should be investing in something a little bit more in line with your risk tolerance, like an ETF or something like that. I don't mean you shouldn't be investing. It just means you should be investing in vehicles that reduce some of that volatility, give you a little bit more diversification and can let you just sleep better at night. No question that it has been a tough little stretch for a lot of names in our universe that we like a lot, and that happens in the face of what seems like some pretty strong business performance on top of it all. A little bit of disparity there, a little bit of discrepancy there, but it is what it is as they say. This is a great example of why we invest the way that we do.

Hill: Well, and something we've talked about before is, and again, it's hard to do, like it's hard for me to do, and I've been doing this for a long time. I imagine people who just started investing in the last five years or so, it's hard for them to do as well, which is to look at a stock in your portfolio that's been cut in half in a short amount of time as several of mine have, and essentially divorce yourself from that and say, "Okay, wait a minute, what about the business? Is the business in trouble here?" It's not to say that every stock out there that's had their price cut, that they are fine. Because some of them are struggling for legitimate reasons. Some of them are just not going to make it in the long run. It is a difficult yet worthwhile exercise when you're looking at a stock that's down and you're thinking to yourself, "All right, should I just cut bait on this one? Should I just let it loose?" It's like, all right, do the work and go through and say, "Well, wait a minute, how is the business doing?"

Moser: Yeah, I mean, that's a great point there. The stock price isn't the business. I mean, the stock price is just one minuscule little point in time. It's not the business. Now, certainly, over time, you will see if a company is performing well, that company grows. The market recognizes that and that's why we tend to focus on those longer time stretches. But you are right, it's not easy to do. It does get easier I think the longer that you do it, at least that's been my experience and I've been investing for a long time, and to me it feels like it gets easier the more you go through it. It's like that less than David Gardner always loves to say "add to your winners." When I first got it over 10 years ago, I wasn't really familiar with that concept. I always felt like you had to be buying something on sale. That was just really my own ignorance honestly, as one of the more valuable lessons I've learned from David is being able to add to those winners, those companies that continue to succeed and do well. That I think gets easier the more you do it, and I think coping with times like these gets easier the more that you go through them, I always look back to the great recession. 

You look back to these moments in time where the market has suffered some serious drops, and going through those they're great lessons. I mean, you learn a little bit about the mechanics of the market and things that are going on, but you also learn a lot about yourself and what you can stomach. The thing is loss aversion is a real thing. I mean, we talked about it some I guess, but ultimately, you look back, Daniel Kahneman and his associate Amos Tversky came up with this term decades ago. It basically helps explain this phenomenon that for most of us our response to losses is stronger than our response to corresponding gains. I mean, that's not just something we say it is a real thing, and some studies suggest that those losses are twice as powerful. If you are feeling like your stomach is in knots right now over what's going on in the market, well congratulations. That means you're human, normal, and most or all of us are feeling that way to some extent because loss aversion is a real thing. But I do believe that the more that you go through times like these, the easier that they get and they make you a better investor, because they teach you about the things to focus on, and honestly, I think it also gives you the confidence to continue investing even in the down-times, because as you know, the idea is to really be buying when everybody is selling, assuming that the business is doing very well. But unfortunately, the knee-jerk reaction for many is that when you know what hits the fan, they want to head for the exits. That's really the opposite of what you need to be doing and you're fighting just centuries and centuries of ingrained human behavior along the way.

Hill: One last thing before we get to Roblox and their earnings. The money managers who are out in force in the financial media take what they say with a pound of salt. I was thinking about this, this morning when Stanley Druckenmiller was on CNBC and talking about the Fed and being pretty bearish and just talking about how he's pulling this money out of the market and all this sort of thing, and I thought, "Wait a minute, where have I heard this before?" It was either the spring of 2018 or 2019 where basically there was a pretty big dip in the market in a short amount of time, and it was Druckenmiller and David Tepper, who owns the Carolina Panthers, and they were coming out, and that's like, "You're managing mountains of money. Forgive me if I'm going to take what you're saying on TV and the advice you're giving. Forgive me if I think you're actually saying one thing and doing another with your money." Because again, it's the whole know which game you're playing. People like Tepper and Druckenmiller are playing a day-to-day game in terms of their money management. They are making investments. They are buying and selling every day, and people like us are not.

Moser: I think that's such a great point. Something that's always important to remember is we're just playing a different game, and that's by design.

Hill: Let's go through some earnings. Roblox went public in March via direct listing. This is the gaming app for kids that is hugely popular. First-quarter revenue, 140% higher than a year ago. Sure, they lost $134 million, but this is a growth company, and at this point, we care more about the revenue and the daily active user growth than we do about things like profits.

Moser: We're going to have to forgive them in regards to the financials just because this company is literally just getting started as a publicly traded entity. But to me, this is a really neat business to follow and learn about. It's one that I was excited to see go public because I wanted to bring it into our augmented reality beyond universe, at least as a company to keep on our radar. It's not something I've formerly recommended by any means, but it is something that I'm learning more about and studying, because it seems like it has so much potential and it's tackling such a massive market opportunity. If you've read the book Ready Player One, or if you've seen the movie, and I've not seen the movie, but I've read the book, I think this business starts to make a little bit more sense. For folks who haven't been able to fully grasp the concept of the metaverse, it may seem a little bit more pie-in-the-sky, but I think for folks who actually see that as something with potential, Roblox looks like a very compelling business from a number of angles, but like you said, yes, it is ultimately this concept of a virtual universe, a place where pretty much anything can happen. 

The Roblox platform itself comprises three core elements which help bring this universe to life. They have the Roblox client, which allows users to explore all of these different 3D digital worlds. They have the Roblox studio, which are the tools that allow developers and creators to build these experiences, and then the Roblox Cloud, which is the infrastructure that powers what they like to call this human co-experience platform. The numbers were very impressive. Revenue grew 140% from a year ago, $387 million. Bookings were up 161%. Average daily active users, 42.1 million, that was up 79% from a year ago. While we talk about this being a platform for kids, which is very attractive for kids, it is a really popular platform with folks a little bit on the older side too. That increase, the daily active users, was driven by 111% growth in daily active users over the age of 13. That all resulted in hours engaged of 9.7 billion, which was up 98% over a year ago. Understanding what's been going on over the last year, folks have had a little bit more free time, we've had a lot of homeschooling, a lot of virtual schooling, and that's given, probably I'm sure, the temptation to switch over from the classroom to the Roblox metaverse, perhaps. But I think that regardless, what you've got is this really sticky universe that is just full of creative ideas and clearly something that's very attractive to a very wide and global demographic.

Hill: You look at the stock, it's basically where it was on the first day of trading in March. I'm not saying this is a cheap stock, but just in terms of, this is not a situation like we've seen with a lot of other businesses that have run up over the past year and are now 30% and 40% off their highs.

Moser: This is one of those companies that's like, "All right, well, you're in this 40 times sales range with Roblox." I understand the enthusiasm. I think valuation with a business like this, typically is going to be one of the bigger risks just because it's so new and still more profitable. Something to keep an eye on I think with a company like this. Developer exchange fees, that represents the amount earned by developers and creators on the platform and they are integral to the story. Those developer exchange fees grew 167% for the quarter. They represented 31% of total revenue versus 28% a year ago. It's going to be interesting to see how they manage that relationship, that balance with their creators, because they really do depend on those creators to keep this universe growing, to keep it fresh, and to keep people coming back more and more. 

Another neat thing about the business that I think holds a lot of potential is this world of virtual currency and cryptocurrency. Roblox has its own currency, Robux, which I think is another tool that can really help stoke engagement and create some switching cost, some stickiness there. We'll be keeping an eye on those types of metrics to really see what staying power this platform has. Because I think that's really one of my biggest questions, does it have staying power? Because it feels like Fortnite was the headline for so long and now Fortnite doesn't seem like it's really getting the same plays it once did. I don't know what that means for the future of Roblox. I think that's something we're going to want to keep an eye on though.

Hill: For folks who are having trouble getting their heads around a gaming concept like Roblox, we'll wrap up by talking about golf, specifically, Callaway Golf. Shares are up this morning close to an all-time high, actually, after a strong first quarter. They are in the business of golf equipment and apparel. Their profits are much higher than expected. They had strong revenue and they're using the word unprecedented with respect to the demand that they are seeing right now. That's a good word you want to hear.

Moser: [laughs] That's the word you want to hear, exactly. Golf is a trick game. Going back to [...] loss diversion when you feel those losses. Listen to me, you go through a round of golf, you hit more bad shots than the good ones, Chris, a lot more bad ones than good ones. You feel those bad ones even more, so I understand why a lot of people just bag the game and don't ever come back. It's hard for sure. I've played golf all my life and I worked in the business for a stretch as well. To me, I've always been of the mind that golf is a tough investment, and I was never really all that attracted to it. I think a lot of that has to do with the fact that I was working in it for so long. I will say, Callaway is making me rethink this a little bit. A lot of it has to do with their recent acquisition of Topgolf. Topgolf, if you know, that's the driving range. It's a driving range/entertainment facility where you can go with your friends to hit golf balls, watch sports, drink beer, have food, all that great stuff. That's something that I think opens up the business to bring more players into the game. Folks who may not necessarily be interested in going out playing nine or 18 holes, but they like hitting golf balls. It makes it more fun. I think that's the toughest nut to crack when it comes to golf, is figuring out ways to make it more fun to bring the wider audience and because it is a difficult game to learn and to play, but the Callaway, clearly doing very well, grew revenue 47% from a year ago. They got a nice little boost from Topgolf, but that really wasn't the crux of the quarter. I mean, it was growth in golf equipment of 29%, their soft goods segment saw a growth of 20%, and that all resulted in their operating income, basically doubling with margins up better than four%age points or 130 bips, if you will. 

To put some context into Topgolf, well, that was just a tiny little portion of revenue this quarter because of the timing of the acquisition. Topgolf's full quarter revenue was $236 million, so that gives you an idea of the potential of that business alone. Then to your reference of that word "unprecedented," that is showing itself in the form of very low inventory levels, inventory is down 19%, supply remains very tight, so they're dealing with a little bit of a supply chain issue as well. That ultimately is probably a good thing for them though because it gives them the opportunity to maintain a little pricing, which traditionally in golf has been a very difficult thing to do.

Hill: It was about this time five years ago that Nike came out and said, "We are getting out of the golf business," and Callaway was one of those businesses that some people looked at and just thought for a moment, like, "Wait a minute," for all the success that Nike has had. Nike is coming out and saying, "We don't want to be in this business anymore." [laughs] I think it was legitimate at the time to look at Callaway and just say, "Okay, so no knock on you guys, but [laughs] is this an industry that we should be investing in at all?" Over the last five years, the stock has tripled.

Moser: I think Nike made a good decision getting out because, honestly, golf equipment is really difficult, and they were working against two really difficult hurdles, two incumbents there in Titleist and Callaway. Titleist and Callaway, two top known names in golf, when it comes to equipment, golf balls, drivers, irons, putters, you name it. I mean, Titleist and Callaway, they're the names that you find in most players' bags. As the owner of the Callaway Rogue Pro Irons, big fan. I got those maybe a year and a half ago or so, and I've really, really enjoyed them. I think when you're going up against two incumbents like that, it's really difficult to gain share even when you had Tiger Woods on your side because Nike was, I think, they're becoming more identified with high-performance equipment, which is fine, and that was probably due to the nature of the relationship with Tiger Woods. But really, most people aren't looking for that high performance. They're looking for player-friendly stuff. 

Titleist, in Callaway, just historically, have done so well. Ping the other name in the space that has done really well over time in that regard as well. I'll throw Ping in the mix there as well as one of the challenges for Nike when it comes to golf equipment. I understand getting out. Still, equipment has always been a very difficult investment for me to stomach. Just the margins never really seem to make a very good case work. But again, this acquisition of Topgolf, to me, is the differentiator for Callaway. I think, at this point, I'm actually very optimistic about that. Frankly, it's got Callaway right at the top of my radar, something that I actually consider now.

Hill: Jason Moser, always great talking to you. Thanks for tagging in today.

Moser: Hey, thank you.

Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening. We'll see you tomorrow.