Growth stocks have been getting hammered over the past month, and this trend has continued into earnings season. Even companies that beat analyst expectations have been hit, largely due to forecasts for slowing growth. PayPal (PYPL 0.64%), for example, has fallen over 44% in 2022 alone -- driven by underwhelming guidance in its Q4 2021 results.
Roblox (RBLX -3.66%) has suffered a similar fate. The company has fallen 50% year-to-date, with much of the drop coming from the company's fourth-quarter results. It reported slowing engagement and bookings, and while Roblox didn't report guidance, some of the figures it did provide gave analysts enough information to assume that the coming year could be painful. Investors like to buy the dip on growth stocks, but buying Roblox right now might be like trying to catch a falling knife.
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1. Slowing engagement
Roblox has been a wildly popular video game for kids, allowing them to build, create, and interact with other gamers around the world in 3-D realms. Roblox has become popular because of the wide range of capabilities inside the game. Lil Nas X -- a famous rapper -- had a concert inside Roblox that attracted over 33 million viewers. The company even has its own in-game currency, Robux, that is used to buy skins and other things inside the game.
The popularity of Roblox, however, might be starting to wear off. The company reported that the number of daily active users (DAUs) is starting to slow. Since Q1 2019, Roblox's DAU count has grown over 40% year-over-year (YOY), even reaching highs of 97%. In the last three quarters of 2021, however, the company reported YOY user growth between 29% and 31%. Some investors were hopeful that the company's popularity would bounce back in Q4, but user growth continues to stagnate.
This also permeated in the hours of engagement on the platform, where the company reported 10.8 billion hours in Q4 -- a sequential decline from Q3. The video game industry at large is a difficult space to remain relevant in due to gamers' tastes and interests constantly changing. Roblox hit its heyday in 2019 and 2020, but the popularity of its game seems to be starting to fade -- a typical occurrence in the gaming industry.
2. Worries about bookings
What scared investors off in Roblox's Q4 results was that this declining engagement looks like it will continue in the future. When a Roblox gamer converts real-life money to Robux, the company gets that money immediately. However, Roblox does not report all of it as revenue right away. If a user buys $100 in Robux, Roblox earns $100 in bookings at the time of the purchase. Therefore, this monitors how much in-game money has been bought, which gives it a gauge of the popularity of the game at that time.
The problem is that Roblox is seeing declines in bookings growth. In Q4, the company's bookings grew just 20% YOY to $770 million, the slowest YOY change since Q1 2019. This figure grew consistently in the triple-digit range in 2020, but the last three quarters of 2021 reported the slowest growth in the past two years. This trend continued into January 2022, when the company saw bookings increase by just 2% YOY.
3. Declining profitability
With declining popularity and future engagement on the ropes, it makes sense that the company's profitability is falling as well. Roblox has never been profitable, but the company's Q4 net loss widened by a wide margin. In the quarter, revenue grew 83% YOY to $569 million, but the net loss grew 144% to $143 million. The company's free cash flow also declined compared to the year-ago period, from almost $119 million to $77 million in Q4 2021.
Roblox is trying to invest heavily in maintaining its popularity, but these investments do not seem to be paying off. In Q4, the company's research and development expenses grew 189% YOY, but it wasn't enough to keep attracting users at the same rate the company has in the past, and that could mean bad things for the future of this gaming company.
Where to go from here
Slowing engagement and bookings are not reasons to sell the company yet, but they are warning signs for Roblox going forward. If the company cannot find a way to reinvigorate its user numbers, the company could continue to lose popularity. While many other video game stocks like Electronic Arts (EA 0.79%) have a wide library of games, Roblox only has one game, which makes it a risky stock to own. If this trend continues for the rest of the year, it might be time to cut bait on this investment, which is why I think you should keep it on a short leash.
