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1 Challenge to Roblox's Amazing Growth

By Parkev Tatevosian - Jun 16, 2021 at 7:15AM

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Children had a lot more time for video games earlier in the pandemic. What happens to Roblox's growth now that there are more distractions?

Roblox (RBLX 2.67%) is one growth stock where the business is performing exceptionally well. Users continue to sign up by the millions to play games and create content on its co-experience platform. 

The onset of the COVID-19 pandemic upended the traditional in-person educational model, and while most kids in the U.S. have returned to their classrooms over the course of this school year, many are still learning virtually for some or all of their classes. In some districts, the school day has been temporarily shortened. Further, many extracurricular activities are still suspended, and entertainment options outside the home have remained limited. All of that has combined over the past 15 months or so to give young people more time for gaming, and that has benefited Roblox immensely. Revenue, engagement, and signups all surged.

Two kids lay on the floor looking at a tablet.

Roblox increased revenue by 140% in the first quarter. Image source: Getty Images.

That being said, economies are starting to reopen in many countries as vaccination rates rise and new case rates fall. In the U.S. especially, it's looking more likely that this fall, the vast majority of schools will be back to fully in-person classes. That could also mean a full resumption of after-school programs, sports, and other extracurricular activities -- all of which would encroach on the time kids have available to engage with the Roblox platform.

Amazing growth  

In the first quarter, Roblox's revenue increased by 140% from the same period last year. The company largely generates that revenue when players buy Robux -- an in-game currency that players can use to purchase items for their avatars or to access restricted games and features. 

The more time a player spends on the Roblox platform, the more opportunities they have to spend Robux. Therefore, an important metric for the company is hours engaged. In the first quarter, engagement increased by 98% from the same quarter of 2020. However, the rate of growth has trended downward for three consecutive quarters.

That deceleration could be a result of the phased reopening of state and local economies. In some parts of the U.S., schools reopened for in-person learning last fall, and other parts of the country have been following suit, although some districts are moving forward at a slower pace based on local conditions. Kids already have less time than they did early in the crisis to play video games. As those trends continue, they will present further headwinds to Roblox's growth. 

What this could mean for investors 

The coronavirus pandemic in essence compressed several years' worth of growth for Roblox into a single year. It was always unlikely that it would be able to sustain that higher growth rate over the long run. Still, Roblox was growing revenue, users, and engagement by roughly 40% even before the pandemic. Investors may not be disappointed if the growth rate of the company's key metrics settles back down to the 40% level once the acute stage of this crisis recedes in the U.S.

The stock is trading now at a forward price-to-sales ratio of 20.66, which is near the high end of its historical range. That's certainly not a cheap valuation, but it still may make a good investment for those seeking a growth stock that can deliver excellent returns over the long term. 

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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