Roblox (RBLX 3.18%), one of the pioneers of the metaverse, is finishing 2021 with a bang. The stock was relatively flat for most of the year but surged higher after October. That's when investors felt comfortable that Roblox would not lose meaningful user growth and engagement momentum during the economic reopening.
Overall, Roblox shares are up 65% year to date in 2021. However, success in one year is not enough to determine success in the next year. Let's dig deeper into Roblox and see if this metaverse stock is still a buy for 2022.
Roblox is not just a stay-at-home company
Roblox makes money by selling a currency called Robux that players can use on its platform. Roblox is free to join, and players can have an enjoyable time on the platform without spending any money on the site. However, certain items and experiences are exclusively available only to players in exchange for Robux.
Roblox is in no shortage of players. In its most recent quarter ended Sept. 30, Roblox boasted 47.3 million daily active users, up from 36.2 million at the same time last year. Perhaps more impressively, Roblox's daily active users were up 4.1 million from the previous quarter. That quarter-over-quarter increase ending Sept. 30, when most major world economies were reopening, eased investor concerns about the viability of Roblox in a post-pandemic world.
It's no surprise that investors were worried about this prospect. After all, Roblox's daily active users surged since the onset of the pandemic. The company's platform caters primarily to school-aged children, and at the pandemic's onset, they were nearly all learning from home. With more time spent at home, the younger population spent more time on electronic devices, and Roblox was a prime beneficiary.
Roblox has a solid cash-generating business model
Interestingly, Roblox does not create the games and the items on the platform that cost Robux to buy. Instead, it allows third-party developers to spend their time and resources to develop these products for the Roblox platform. In exchange, Roblox gives developers a percentage of the game or item's revenue. That business model generates healthy cash flows. Players deposit money onto the platform, and Roblox only pays developers when players spend money on items or experiences they created.
Indeed, free cash flow has surged at Roblox since the pandemic's onset, reaching $171 in its third and most recent quarter. That's up from $159 million from the same quarter last year. More importantly, Roblox's free cash flow had eclipsed $100 million in each of its previous six quarters since the pandemic's onset, save for Q2 2020, when it was $98.7 million. That's in stark contrast to 2019, when free cash flow for the entire year was less than $15 million.
Still, the surging free cash flow appears to be priced into the stock. Roblox is trading at a price-to-free cash flow of 94, near the highs for the year.
Roblox is an excellent metaverse company that hit its stride in 2021. Roblox could undoubtedly be a buy for 2022, but investors should be cautious of the price they pay for the stock.