The Nasdaq index has fallen into correction territory over the past week, falling over 11% year to date. The Nasdaq is primarily made up of high-growth technology companies, and these types of companies have been crushed not only in 2022 but over the past three months.
Roblox (RBLX -3.66%) is one of these tech stocks, and it has one of the leading video games for younger users. Like many other tech companies, Roblox has been crushed recently, falling 31% in 2022 alone and over 47% from its all-time high. Does this major price discount give investors like you and me a great buying opportunity, or should investors shy away from Roblox stock? Let's find out.
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A leading gaming company
Roblox has built a platform with multiple worlds where gamers can do almost anything. On the Roblox platform, gamers can build their worlds, play games, and build immersive experiences. Lil Nas X -- a famous rapper -- even created a virtual concert on Roblox where he performed in front of 33 million users. Roblox has become one of the most popular games among young kids: In the third quarter of 2021, the company had 47.3 million daily active users who played over 11 billion hours on the platform.
Roblox is more than just a single video game, but it is home to millions of developed worlds -- all serving different purposes. One gamer can create their world to live on, but they can also have a separate world where they play multiplayer games with their friends. Because of this aspect, the creativity unlocked for gamers can be limitless. Users can have dozens of different experiences and worlds on the platform, allowing them to never get tired of it. It also allows them to build whatever they desire, all of which increase engagement and monetization.
Roblox has a unique way of monetizing its gamers: It has an in-game currency used for everything. If a gamer wants a new skin, access into a special part of a developer's world, or to trade goods, they'll use Robux to do so. The company takes a slice off of every transaction on the platform when gamers turn real currency into Robux, and with $638 million in bookings -- where gamers have bought Robux but haven't used it in-game yet -- this revenue strategy has been impressive. In Q3 2021, the company brought in over $509 million, which increased 102% year over year.
The company is not profitable, but this should not be a worry to investors. In the first nine months of 2021, the company lost $356 million, but that only represented roughly 26% of the revenue it brought in during that period. The company also has almost $2 billion in cash on the balance sheet, and it generated roughly $488 million in free cash follow over the same period.
A potential metaverse pick
Roblox -- as with many gaming stocks --could become a critical part of the metaverse in the coming years. Roblox has already built an immersive experience that many of its users see as their second home. Lots of real-life experiences, like concerts, have also been moving onto the platform, which will make it easier and more normal to continue having these real-life experiences on Roblox.
One main risk is what kind of customers it has. Many investors worry that Roblox users are too young and will eventually move away from the platform or use it much less as they get older, something that has been seen in dozens of other video games targeted at youth gamers. Roblox touts that over 50% of its users are above 13 years old, but that does not give the full story. While the majority of its user base might be older than 13, just 14% of the company's user base is over 24, according to Statista. The company needs to continue seeing growth in its older user demographic, especially the adults playing the game, but if it cannot, Roblox might become a fad gaming platform.
Is it a buy?
The company is valued at 21 times sales -- a steep multiple, especially when so many other stocks that previously traded at high multiples like this have fallen recently. Other gaming companies like Microsoft -- known for its Xbox and its Roblox-like video game Minecraft -- Activision Blizzard, and Electronic Arts all trade much lower, around six to 13 times sales.
While the company is improving its user demographic to older kids, I still have concerns about how many kids over the age of 18 are playing this game. Roblox does not have the best graphics, and these can be seen as "childish" or "immature" by young adults looking to feel more mature and act older.
Roblox doesn't break out its over-18 user base, likely because it would be very low. It is good to see that its user base is getting slightly older, but for Roblox to be investable I would want to see confirmation that older kids and adults are playing this game as much as younger kids are. Until I see that, I will not invest in the company.
