Roblox (RBLX 3.83%) and Unity Software (U 0.92%) both saw their stocks surge to all-time highs last November as the bulls stampeded toward high-growth "metaverse" plays. However, investors who chased those rallies were badly burned as rising interest rates crushed the market's priciest growth stocks.
As of this writing, Roblox and Unity stock prices have declined about 75% and 80%, respectively, from their all-time highs. Should investors consider buying either fallen metaverse stock as a turnaround play in this tough market?
image source: Getty Images.
What happened to Roblox?
Roblox's platform enables its users to create simple block-based games without any coding knowledge. Its creators can share their games with other users, then monetize them with in-game items and features. Those purchases are funded with an in-game currency called Robux.
Roblox's simple interface appealed to tween users, and its popularity skyrocketed throughout the pandemic as more students stayed at home. But like other pandemic-era growth stories, Roblox's growth decelerated against tough year-over-year comparisons as the lockdown measures ended.
Roblox's revenue rose 82% to $924 million in 2020 and then increased 109% to $1.9 billion in 2021. Its bookings -- which more accurately gauge its underlying growth by measuring its direct sales of Robux -- increased 171% to $1.9 billion in 2020, but grew only 45% to $2.7 billion in 2021.
That post-lockdown slowdown was reflected across its other metrics: Its number of daily active users (DAUs) increased 85% to 32.6 million in 2020 but rose only 40% to 45.5 million in 2021. Its average bookings per DAU (ABPDAU) grew 47% to $57.77 in 2020 but improved just 4% to $59.85 in 2021.
In the first quarter of 2022, Roblox's revenue rose 39% year over year to $537 million, but its bookings declined 3% to $631 million. Its DAUs grew 28% to 54.1 million, but its ABPDAU fell 25% to $11.67 as those users spent less money. Its bookings and ABPDAU continued to slide throughout April, and analysts expect its bookings to grow just 4% for the full year.
Roblox's growth is cooling off, but it's still swimming in red ink. Its net loss widened from $253 million in 2020 to $492 million in 2021 and then widened year over year from $134 million to $160 million in the first quarter of 2022.
Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also fell 64% year over year to $68 million in the first quarter, and analysts expect that metric to decline 43% for the full year.
What happened to Unity?
Unity's game engine is used to create more than half of the world's mobile, console, and PC games. Its Create platform bundles together various creative tools for graphics, sounds, and other assets, while its Operate platform provides integrated advertising, analytics, and payment services.
Unity also provides tools for virtual-reality, augmented-reality, and non-gaming applications. Its recent acquisition of Weta Digital, which created the special effects for movies like The Lord of the Rings and TV shows like Game of Thrones, extends its reach into the filmmaking market.
Unity initially dazzled investors with its impressive growth. Its revenue increased 43% to $772 million in 2020 and then grew 44% to $1.1 billion in 2021. It also repeatedly told investors it could grow its annual revenue by more than 30% over the long term. Its revenue rose another 36% year over year to $320 million in the first quarter of 2022.
Unfortunately, Unity dropped a bombshell on its investors during its first-quarter report. It admitted that its Audience Pinpointer tool, which uses machine learning algorithms to deliver targeted ad campaigns, had ingested a lot of "bad data," which made it impossible to monetize some ads. It now needs to rebuild that algorithm, and that hard reset will shave about $110 million off its full-year revenue.
As a result, Unity now expects its revenue to grow just 22%-28%, which broadly missed the consensus forecast (at the time) for 31% growth. Unity says its long-term growth targets remain intact, but the next few quarters could be rough as it addresses its software problems.
Unity's net loss widened from $282 million in 2021 to $533 million in 2021, partly because of its acquisition of Weta, and widened year over year from $107 to $178 million in the first quarter of 2022. On a non-generally accepted accounting principles (non-GAAP) basis, its net loss narrowed slightly, from $66 million in 2020 to $62 million in 2021, and then narrowed year over year from $27 million to $25 million in the first quarter.
Analysts expect Unity to remain unprofitable on a GAAP basis for the next few years, but the company believes it can achieve non-GAAP profitability by 2023.
The valuations and verdict
Roblox trades at six times its estimated bookings this year, while Unity trades at seven times its projected revenue for the year. Those low valuations could limit their downside potential in this challenging market, but both companies sorely lack near-term catalysts.
I wouldn't rush to buy either of these stocks right now. But if I had to choose one over the other, I'd pick Unity because its growth should accelerate after it heals its self-inflicted wounds. Roblox's future looks murkier since it still hasn't proved that it can generate sustainable growth in a post-lockdown market.
