Roblox (RBLX -1.62%) updated investors by releasing its first quarter of 2022 earnings on May 10. The company then held a conference call to discuss the results on the morning following the announcement. Investors liked what they heard from the metaverse pioneer, and the stock price is shooting higher.
The stock was under pressure for several quarters as investors worried about how customer engagement would adapt as economies reopened. The update assuaged some of those concerns, but Roblox stock is still some 80% off its high even after the recent rise. Let's look closer at some of the Q1 figures and determine if investors should buy the stock now.
Roblox is capitalizing on an untapped opportunity
Note that Roblox is free to join and use and is most popular among the younger population. The company makes money by selling an in-game currency called Robux. Some items and experiences on the platform require Robux to enjoy and are unavailable to non-paying players. As of April, Roblox boasted 53.1 million daily active users, up 23% from the same time last year. Impressively, it added players even as economies reopened and kids returned to classrooms.
That said, there are still signs of a continued slowdown in some parts of its business. For instance, engagement from users in the U.S. and Canada, its most lucrative region, decreased by 10% year over year in Q1. That was the fourth consecutive quarter when engagement failed to grow year over year. Additionally, average bookings per daily active user (ABPDAU) are falling. In Q1, ABPDAU fell by 25% from the same time last year. Again, it was the third straight quarter of decline and is accelerating downward. There was certainly enough poor data to satisfy the glass-half-empty investor.
However, there was more good news than bad. Management noted that in April, booking trends improved over March. For several quarters, the company had been saying that it expected the decreases in bookings to turn around in the May to June months, and it looks as though they estimated correctly. If the trend continues, it could mean that the headwinds from reopening economies have abated, and Roblox could accelerate growth.
Finally, as mentioned earlier, Roblox primarily makes money by selling Robux. That means millions of players use the platform daily and are not monetized. The under-monetization was an untapped opportunity that investors wanted management to capitalize on. In a shareholder letter that accompanied the earnings release, management talked extensively on the subject:
We are now increasing our focus on improving the monetization per hour of time spent on our platform across all age demographics and around the world. As we improve monetization per hour, we expect to see additional top-line growth. Our dedicated Economy team is focused on three primary areas: discovery, advertising, and UGC [user generated content] catalog.
The opportunity could be huge. During its first quarter of 2022, Roblox was only making money from roughly 14 million of its players.
Roblox stock is far from expensive
Even after the increase following the earnings release, Roblox stock is not expensive. At a price-to-free-cash-flow ratio of 25, it is still near the lowest in years. Investors can undoubtedly start buying shares of Roblox in parts, adding more with each quarter that Roblox demonstrates a decreasing headwind from economic reopening.