Once a darling of the stay-at-home bull market, Roblox (RBLX 1.61%) has seen its stock price crater over the last six months. Shares are down a breathtaking 78% since last fall.
Much of the decline came after the company announced disappointing earnings results back in February. With the company poised to report first-quarter earnings results on May 10, investors want to know: Is now the time to buy Roblox?
Let's examine the bull and bear cases.
Bear case: Key metrics are declining and analysts are cutting earnings estimates
Bears argue that Roblox was something of a flash in the pan. They say pandemic lockdowns and school closures drove its staggering popularity in 2020 and 2021. Now, with pandemic restrictions mostly in the rearview mirror in the United States and Europe, the argument follows that school-age children (Roblox's primary audience) will turn away from the online platform and its prospects will evaporate.
And the bears have some data to back up their thesis. Roblox itself announced in its February 2022 key metrics press release that estimated bookings (purchases of its online currency) dropped between 2% to 4% compared to February 2021. Furthermore, the average booking per daily active user fell to between $3.68 and $3.74 -- a decline of 24% to 25% from a year earlier.
None of this inspires confidence in the analyst community. As a result, full-year 2022 earnings estimates were slashed after the February earnings miss and haven't recovered. Unless and until Roblox management shows it can meet or beat the analyst estimates, expect the stock to remain under pressure.
Bull case: Cheaper valuation and low expectations provide an opportunity
The Roblox bulls see last quarter's earnings miss as an opportunity, not a challenge. Expectations are low, and the company has already telegraphed that daily active users and total hours engaged should rise significantly on a year-over-year basis. If the company outperforms on any of its other key metrics (total bookings or average bookings per daily active user), shares should get a boost.
Moreover, from a valuation standpoint, the stock has never been cheaper. Its current price-to-sales (P/S) ratio is 7.99. This is well below its one-year average P/S ratio of 25.16.
Is it a buy?
It's important to remember that Roblox is a young company. It went public just over a year ago on March 10, 2021. As its management team gains experience, I'm confident it will find ways to better monetize its platform. What's more, Roblox's market cap is now only $18 billion, making it attractive as an acquisition target. If you're OK with holding through some volatility, Roblox looks like a solid way to invest in the metaverse.