Roblox (RBLX -0.59%) thrived at the start of the pandemic. The metaverse pioneer catered primarily to young children and teenagers and gained millions of new users as schools sent kids home for remote learning and canceled extracurricular activities.
That said, now that schools are back to classroom learning and after-school activities are restarting, user engagement is showing signs of slowing at Roblox. The rise and fall, among other factors, created a diversity of opinion on Roblox stock. Let's take a look at both sides of the argument.
Image source: Getty Images.
The bull case
Enthusiasm for Roblox starts with the massive daily active user growth and asset-light business model. As of January, Roblox boasted 54.7 million daily active users. That was 32% higher than at the same time in the prior year. Roblox is free to join and use, which might explain some of the rapid user growth. Still, there are many free entertainment options in today's world for young kids and teenagers; the fact that over 50 million of them choose to log on to Roblox daily is impressive.
Roblox's business model is another attractive feature for investors. The company makes money by selling an in-game currency called Robux. While most of the site is free to use, some experiences cost Robux to enjoy. Roblox outsources these creations, transferring the risk of time, effort, and resources to third-party developers. Roblox promises creators a share of the revenue their designs generate. In that way, Roblox only pays for content that brings in more revenue than it costs.
That philosophy has helped Roblox generate tremendous free cash flow growth. Indeed, Roblox was on a streak of five consecutive quarters of over $100 million in free cash flow before the streak ended in the fourth quarter of 2021.
The bear's perspective
That transitions nicely into the bear case, which argues that the company thrived during the pandemic but will slow dramatically in its aftermath. Several metrics are highlighting that trend. For example, Roblox's trailing free cash flows peaked at $599 million in the third quarter of 2021, backing down to $558 million in the next report:
RBLX Free Cash Flow data by YCharts
Overall, user figures are growing, but Roblox is shedding players from its most lucrative U.S. and Canada region. After peaking at 3.1 million in the first quarter of 2021, users from the U.S. and Canada decreased to 2.5 million by the end of Q4.
In a further sign of a pullback, average bookings per daily active user, which measures player deposits that later become revenue, decreased by 22.5% year over year in January 2022. There was always a concern that Roblox could not sustain the gains it made during the pandemic, and the latest figures are proving the pessimists right.
Management said the reversal from economic reopening is likely to end by the middle of 2022. Investors are not placing much faith in that estimate. The stock is down 68.6% off the high reached late in 2021 as the bear camp on Roblox is growing larger.
