What happened
Roblox (RBLX 1.60%) has seen its gaming platform explode in popularity over the last few years, but growth stocks have fallen out of favor with investors in the past month.
The shares extended last month's losses to start the year, currently down 11.7% week to date as of 12:06 p.m. ET on Thursday, according to data provided by S&P Global Market Intelligence.
Image source: Getty Images.
So what
Growth stocks are underperforming value stocks to start 2022. The main reason for that is the Federal Reserve's intention to begin raising interest rates to curb the highest rate of inflation in nearly 40 years.
The 10-year U.S. Treasury rate has been rising since bottoming out in the summer of 2020. Companies are valued based on the present value of their future cash flows, so higher interest rates means those future cash flows are worth less to investors.
This explains why Roblox is getting hammered right now. The stock traded for a price-to-free-cash-flow ratio as high as 105 before the recent sell-off. It now trades at 75.
Now what
A rising interest rate is not a reason to sell Roblox. The company has continued to post strong growth recently. For the third quarter, revenue doubled year over year, with hours of engagement on the platform reaching 11 billion for an increase of 28% over the same quarter a year ago.
With 49 million daily active users, Roblox is becoming an important platform for major brands to connect with young generations. Earlier this year, Netflix launched its Stranger Things persistent space on the platform, and it's been visited 26 million times. Nike announced its own virtual world called Nikeland recently.
New brand partnerships and growth in daily active users are telling signs of increasing business value, which is all that matters for the stock over the long term.
