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Roblox Stock: Bull vs. Bear

By Parkev Tatevosian, CFA and Jeff Santoro – Dec 22, 2021 at 6:25AM

Key Points

  • Roblox stock looks expensive when measured by price-to-sales and price-to-free-cash-flow metrics.
  • Economic reopening is slowing customer engagement at Roblox.
  • Roblox is adding innovative content to drive user engagement.

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Is Roblox's rise just getting started, or has it gone too far too fast?

As one of the pioneers of the metaverse, Roblox (RBLX -0.99%) has been getting a lot of attention lately. The industry rose to the forefront of investors' minds after Meta Platforms (META -1.06%), the company formerly known as Facebook, made a significant commitment to becoming a leader in the metaverse. 

So does the entry of the social media giant spell doom for Roblox? Or is the increased attention in the metaverse good news? Here, two contributors make a bull and bear case for Roblox.  

Two kids on an electronic device.

Image source: Getty Images.

Bear case: An expensive valuation and economic reopening headwinds

Parkev Tatevosian: Admittedly, it's challenging to make a bear case for a company like Roblox that is growing revenue, customers, and cash flow as rapidly as it is. However, there are some points of caution for those interested in Roblox stock. 

Roblox is most popular among the younger demographic. Indeed, almost 50% of their user base is under 13 years old. And, of course, that demographic rushed to Roblox in large numbers at the onset of the pandemic when schools were closed and extracurricular activities were paused. There is already some evidence that new user growth is decelerating to levels lower than before the outbreak. That's increasing the risk that when or if the world fully puts the COVID-19 pandemic behind it, Roblox could have difficulty adding new users.

Roblox is free to join, and most customers can have plenty of fun without depositing money on the platform, but some experiences require players to buy Robux, an in-game currency. In its most recent update, Roblox noted that the average bookings per daily active user decreased by 8.5% in November year over year. The metric assesses the average amount of in-app purchases for daily active users. This metric has been on a downward trend since peaking last year, signaling that economic reopening could hurt Roblox.  

Finally, Roblox stock looks expensive, trading at a price-to-sales ratio of 30 and a price to free cash flow of 82. The business is priced as if the good times will continue, when in reality, economic reopening may slow Roblox down considerably.

Bullish take: Building the metaverse

Jeff Santoro: The metaverse has become a hot phrase lately. Put simply, it's a virtual world in which people can interact. From a business standpoint it opens up many new avenues for monetization and many companies are scrambling -- some are even changing their name (Facebook changing to Meta Platforms, for example) -- to get a foothold in this new virtual world. For Roblox, that foothold has not only been established, it is thriving.

Roblox is a platform that allows developers to create immersive online worlds and games that are geared for younger children, evidenced by the fact that approximately half of its users are under the age of 13. After seeing strong user growth and engagement through the pandemic, some thought the user growth might slow as the world began to reopen and kids spent less time on devices. That hasn't been the case.

In the most recently reported quarter, year-over-year daily active users grew 31% and total hours engaged increased 28%. Although users seem to be spending less on in-app purchases as noted in the bear case, the increase in the number of daily users has offset the slip. This user growth led to a higher overall total of virtual items being purchased -- which is Roblox's primary revenue source -- and revenue grew 102% year over year. Roblox is clearly a hit with kids, who are playing, and spending, more and more.

A strong bull case for any stock has to include future growth opportunities, and Roblox has already signaled its plans for the future. This last quarter featured an 18% increase in experiences where the majority of users were 13 and older, an important statistic for a company that runs the risk of losing users as they get older. Additionally, Roblox has begun to host experiences on its platform. Recently Roblox hosted a concert by the hit music group Twenty One Pilots that led to over 1 million hours in engagement. With impressive growth metrics and a clear plan for keeping its users and expanding its offerings, Roblox is a great buy right now for investors looking to capitalize on the opportunities presented by the metaverse.

Overall, whether you think Roblox stock is a buy or sell depends on your assessment of how user behavior will evolve as economies reopen. If you think Roblox can sustain user engagement despite other entertainment options, then you are leaning toward buying Roblox. If you think user engagement will fall off as out-of-the-home activities become available again, then you're not likely to buy Roblox. Nevertheless, what Roblox has achieved up to this point is impressive. 

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jeff Santoro owns Roblox Corporation. Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool owns and recommends Meta Platforms, Inc. and Roblox Corporation. The Motley Fool has a disclosure policy.

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