Roblox (RBLX -2.24%) has been experiencing hard times since economies started reopening last year. The stock is down 79% off its high as investors worry about declining customer engagement.
Still, the metaverse pioneer could turn things around for investors in the coming weeks. Roblox is scheduled to report 2022 first-quarter earnings next week, and that could be the catalyst that boosts the share price.
Investors will get an update from Roblox on May 10
Unsurprisingly, engagement trends started declining as schools reopened and kids were back in classrooms. Roblox's platform is most popular among the younger generation, and with kids returning to in-person instruction, that left less time to engage with Roblox. The bigger worry for investors is how far this decline will go and how long it will last.
Kids are notorious for being laser-focused on a single activity for an extended period and then forgetting it altogether. Investors fear this could be the case with Roblox. Will kids disengage entirely from the app as away-from-home activities take on more importance?
That could be answered during the company's first-quarter earnings release on May 10. Management had earlier noted that it expected the declines could reverse in the middle of 2022. If Roblox updates investors and informs them that trends have turned upward, it could be an excellent time to buy the stock. After falling so steeply off its high, Roblox is trading at a price-to-free-cash-flow (P/FCF) multiple of 25, near the lowest in its history.
Roblox's app is free to join and use, and it makes money by selling an in-game currency called Robux. Players use this currency to purchase premium experiences unavailable to free users. Interestingly, Roblox does not create these premium experiences. Instead, it outsources this activity to third-party developers who spend time and resources developing these games they hope players will enjoy. Roblox entices developers by offering them a percentage of the revenue their creations generate.
As of February, Roblox boasts 55 million daily active users, a large base that makes it worthwhile for developers to take on the risk of creating things that may flop. The business model allows Roblox to take in customer cash first and only pay the developers who create things its users enjoy. In that way, Roblox only pays for experiences its customers are willing to pay for.
Roblox is worth taking a chance on
After surging in the earlier parts of the pandemic, cash from operations is declining. However, if management notes that engagement trends are improving, it will only be a matter of time before cash from operations returns to growth -- that is, of course, if the improving trends persist beyond a single quarter. Therein lies one risk with investing in Roblox in the coming weeks should management signal reaccelerated growth but the improvement does not last.
With the shares sharply off their highs and trading at a historically low P/FCF multiple, the potential payoff is worth taking the risk of investing in Roblox.