Is Roblox Stock a Buy Now?

Roblox's (RBLX 3.39%) stock dropped 15% during after-hours trading on Feb. 15 after it posted its fourth-quarter earnings report.

The social gaming company's revenue rose 83% year-over-year to $568.8 million. But its bookings, which more accurately reflect its underlying growth, rose 20% to $770.1 million and missed expectations by $2 million.

Its net loss widened from $58.7 million to $143.3 million, or $0.25 per share, which also broadly missed analyst estimates by $0.13. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also declined 26% year-over-year to $168 million.

Image source: Roblox.

Those headline numbers were messy, but should investors consider buying Roblox after its post-earnings pullback?

Is Roblox losing its momentum?

Roblox is a divisive stock. The bulls believe its gaming platform -- which enables its users to create, share, and monetize simple block-based games without any coding knowledge -- will expand beyond its core tween audience and lock more brands into its evolving "metaverse" world.

The bears believe Roblox's growth spurt during the pandemic -- which was largely driven by students staying at home -- is unsustainable. They also believe its "tween" creators will eventually graduate to more advanced game development platforms like Unity (U -10.22%) or Epic Games' Unreal Engine.

Roblox's revenue growth looks impressive, but its bookings growth -- which reflects its underlying sales of Robux during each period -- is decelerating:

Data source: Roblox. YOY = Year-over-year.

In January (the first month of the first quarter of 2022), Roblox's bookings grew just 2%-3% year-over-year. That anemic growth indicates that the company's high-growth days might already be over.

Roblox's other growth metrics look wobbly

Roblox's daily active users (DAUs) grew 33% year-over-year to 49.5 million in the fourth quarter, marking an acceleration from the previous quarter. That acceleration was impressive, considering that it temporarily lost more than three million DAUs during a service outage last October.

However, Roblox's average engagement hours also declined sequentially as its average bookings per daily active user (APDAU) fell year-over-year for the second consecutive quarter:

Data source: Roblox.

These mixed numbers, along with Roblox's slowing bookings growth, indicate the platform is still attracting more users -- but it isn't effectively monetizing them. It blames that slowdown on its focus on gaining more international and older users (above the age of 13), which generate lower ABPDAU.

Those headwinds will likely persist in January. Its DAUs grew 32% year-over-year to 54.7 million during the month as its average engagement hours increased 26%, but its ABPDAU declined 22%-23%.

There's still no path toward profitability

As Roblox's engagement and monetization rates decelerate, its losses continue to widen. Its net loss widened from $71 million in 2019 to $253 million in 2020, then widened to a whopping $492 million in 2021.

Those losses were mainly caused by Roblox's developer exchange fees (the cash it pays creators for trading their Robux back to real-world currencies), cloud infrastructure costs, safety-related expenses for children, R&D expenses for new features, and high stock-based compensation expenses (18% of its revenue in 2021) to fund its salaries. It can't significantly reduce any of those costs as it expands its business.

To make matters worse, Roblox's total liabilities more than doubled to nearly $4 billion in 2021, partly due to a $1 billion junk bond sale last year, giving it a stunning debt-to-equity ratio of 6.7. At the same time, it continues to dilute its own shares with its high stock-based compensation. As a result, its total number of weighted-average shares nearly tripled throughout the year.

Avoid Roblox for now

Roblox's decelerating bookings growth, sluggish monetization rates, widening losses, rising leverage, and ongoing dilution make it a tough stock to recommend as rising interest rates rattle the market.

The stock also doesn't seem like a screaming bargain at about ten times this year's sales, especially when other promising growth stocks are trading at comparable valuations. I believe investors would be better off sticking with Unity, which is a more balanced play on the gaming and metaverse markets, than taking a chance on Roblox's murky vision for the future.