Although it's in very early stages, one core pillar of the metaverse is gaming. This makes sense because gamers will be able to interact and socialize with one another with the development of virtual and augmented reality. It seems like every technology company is looking to capitalize on rising interest in the metaverse, with behemoths such as Meta Platforms and Nvidia leading the way.
Roblox (RBLX 2.87%), a smaller gaming company and Cathie Wood favorite, has also made a name for itself as a key player in this next frontier of the internet. However, the company's growth and popularity have not come without criticism. Roblox was slapped with a short report earlier this month, and recently reported less than stellar 2021 full-year earnings. Is now the time to sell, or buy on the dip?
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The bears come out of the cave
Roblox had one of the best-performing initial public offerings (IPO) of 2021. On its very first day of trading in March 2021, the company's stock price rose 50% to nearly $70 per share. By November, the company's stock had doubled and hit a 52-week high of $141.60.
Roblox shares are trading near a 52-week low. Although some of the decline can be attributed to heavy sell-offs in technology stocks, the fact is that Roblox has company-specific issues that it needs to address.
Earlier this month the company was hit with a short report from The Bear Cave. Short reports are periodically issued by financial markets participants such as hedge funds, and typically outline a number of reasons why the firm believes the company is a poor investment and the stock might be a good candidate to be shorted. From an analytical standpoint, sometimes hedge funds believe that a company's business model is broken and that its ability to remain in business is unlikely.
Although being the subject of a short report is not ideal, it is important to note that The Bear Cave is not a formal financial institution. This means that it is not a registered investment fund managing institutional capital on behalf of investors. Rather, The Bear Cave is an online forum managed by a team of analysts conducting research. Despite the fact that it may not carry the brand-name recognition of a Wall Street bank, the report did contain some concerning analysis.
What about the business?
As highlighted in the report, Roblox has been at the center of a number of concerns, specifically as it relates to its users who are primarily children. Another Wall Street bear, Benchmark analyst Mike Hickey, expressed concern over Roblox's ability to protect children in the virtual worlds of its games. He states, "we are not convinced that Roblox offers a safe play environment and worry over the potential for child abuse."
This is not the first time user demographics and age have become a focal point for large public companies. Instagram, which is owned by Meta Platforms, has been the subject of concerns over mental health issues in teenagers, while companies like Snap have faced backlash from parents and teachers who are worried that its service, Snapchat, appeals to younger demographics for reasons beyond simple video clips.
Although issues around mental health and child safety should not be dismissed, those are really just the beginning of the problems for Roblox. The company recently announced its full-year 2021 financial results. Investors identified a number of issues and reacted with a fresh sell-off, dropping the stock price by more than 20%.
For the full year 2021, Roblox generated $1.9 billion in revenue, up 108% year over year. Additionally, daily active users were 45.5 million, an increase of 40% year over year, while total hours engaged were 41.4 billion, an increase of 35% year over year.
When looking at the fourth quarter, though, investors may see some problems. Roblox reported total bookings of $770 million, which was a narrow miss from Wall Street's consensus estimate of $772 million. Moreover, the company's loss per share was much wider than expected. Roblox reported a net loss per share of $0.25 compared to estimates of $0.13.
The company provided a preview of January 2022 results by indicating to investors that bookings were between $220 million and $223 million, which represents a 2% to 3% year-over-year increase. Stifel Nicolaus analysts saw management's comments and were publicly questioning why management was anticipating a slowdown in comps from February to April of this year.
One possible explanation for the slowdown could be the increasing number of children returning to in-school learning. Should this hold merit, it is reasonable for investors to wonder if Roblox purely benefited from the pandemic, and isn't truly an integrated application of the metaverse. The combination of financial and non-financial results is certainly reason to remain skeptical of Roblox's future.
Is now a buying opportunity?
Ark Invest Chief Executive Officer Cathie Wood has been a champion of Roblox since its IPO. The tech-focused investor has steadily increased her investment firm's position and now owns 1.3 million shares. Following the sell-off after the weak Q4 report, Wood scooped up nearly $20 million worth of shares.
Although some may view this buying as a mistake, it is important to note that Wood exercises a long-term investment philosophy. Although the company's growth seems to be slowing, there are some positives. For the full year 2021, net cash from operating activities was $659.1 million and free cash flow was $558 million. This is pretty impressive considering the company is not yet profitable and does not plan to be until 2025.
Despite some growing pains, Roblox still holds $3 billion of cash on the balance sheet and remains a top player in the gaming industry. Even though the company is trading at all-time lows, investors should exercise caution before initiating a position. Roblox still has a lot to prove, and with tech behemoths gobbling up gaming assets the company has its work cut out for it.
