When Roblox (RBLX 1.60%) came to the public markets via direct listing in early 2021, investor excitement was evident as the stock closed on its first day of trading up 54% at $69.50. Leading up to its most recent earnings release on Nov. 8, shares had seen modest appreciation, closing that day at $77.
Since that report, shares are up over 40% but are cooling a bit from the post-earnings pop that saw the price hit a high of $134.72 on Nov. 19. Large gains in a short amount of time often make investors feel like they missed the boat. So is it too late to buy Roblox? Let's take a look.
Image source: Getty Images.
The metaverse is now
Roblox is one of the hottest gaming platforms around for younger children, with approximately half of its users under the age of 13. The platform creates a virtual space -- or metaverse -- where users can interact with friends in a variety of games within the Roblox app. While the gaming platform is likely the most well-known aspect of Roblox's business, there are also two other components to the platform that help drive its success. Roblox Studio allows developers to create the games users play, and Roblox Cloud provides the infrastructure that powers the platform. The vast majority of revenue comes from in-game purchases of items using its digital currency, Robux.
For investors who believe the metaverse will be the next evolution of the internet, Roblox has undeniably secured a foothold in this virtual world. In the past year, the company has seen strong growth in its user metrics.
| Metric |
Q3 2020 |
Q3 2021 |
Change |
|---|---|---|---|
|
Daily Active Users |
36.2 million |
47.3 million |
31% |
|
Hours Engaged |
8.7 billion |
11.2 billion |
29% |
Source: Company SEC Filings.
What's most encouraging about this past year's growth is that it includes 12 months when the world started to open up from the pandemic shutdowns. If there was fear that Roblox was a "pandemic stock" that saw artificial growth, this past year should put some of those concerns to rest.
The future of Roblox
Roblox isn't relying solely on its gaming platform to increase engagement and grow its business. In the third quarter, Roblox hosted some significant music events that helped solidify its place in the metaverse. A launch party that Roblox hosted for BMG artist KSI garnered more than 17 million views, and a concert by Twenty One Pilots led to over 1 million hours in engagement from users in 160 countries. These events not only drive engagement generally, but they also provide reasons for the company's younger demographic to remain active on the platform as they get older.
According to management, 28% of the top 1,000 experiences were "aged up" -- a term defined as content where a majority of users are aged 13 or older. This shows an increase from 10% of the top 1,000 experiences in the year-ago quarter. If Roblox can keep users engaged as they get older, it stands a chance to build a significant lead in the creation of the metaverse.
Strong Q3 results
This impressive user growth has led to strong financial results. Third-quarter year-over-year revenue growth was 102%. Although this growth was a deceleration from the previous two quarters, it's still stunning. Roblox remains unprofitable, but the company has created $481 million in free cash flow for the first nine months of the year. It also ended Q3 with $1.9 billion in cash and cash equivalents on the balance sheet and only $244 million in debt. Financially, Roblox is producing the results that have justified its stock's run-up in price.
But is it too late to buy?
As has become common with growth stocks in the tech sector, Roblox's success has led to a high valuation. At the time of this writing, Roblox stock has a price-to-sales (P/S) ratio of 29. While not cheap, it is lower than it was at the time of Roblox's direct listing. What's important for investors to understand is that Roblox is still a new company on the public markets, and it's likely there will be some volatile swings in stock price.
For a company growing revenue at over 100%, investors should expect to pay a premium on its price. It's not too late to buy Roblox, but more price-conscious investors may want to keep it on their watchlist to see if market volatility brings a more attractive entry point.
