It seemed like all anyone could talk about in late 2021 was the metaverse. Investors wanted anything they could do with the concept, defined generally as an interconnected virtual world, as many prognosticators said it was the future of the internet. Facebook even changed its name to Meta Platforms to highlight its focus on this trend.
Perhaps no company exemplifies what people mean by the metaverse more than Roblox (RBLX 5.41%), a virtual platform where people can play games, interact with friends, and explore different worlds. In late 2021, investors bid up shares of the stock, which at one point soared more than 200% from its direct-listing price. However, with waning excitement over the potential of the metaverse and a sharp bear market in technology stocks, Roblox stock has fallen severely from its all-time high.
Down 70% just this year, is Roblox stock a buy right now? Let's investigate.
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Mixed first-quarter results
Roblox released its first-quarter 2022 earnings results on May 10. Revenue increased 39% in the period to $537.1 million, which might make you think it was a fantastic quarter. But since the company is required to defer money it brings in by selling its virtual currency, Robux, investors should look at net bookings as a better indicator for top-line growth. Revenue, even through the use of generally accepted accounting principles (GAAP), is too backward-looking for a company like Roblox.
In the first quarter, bookings fell 3% year over year to $631.2 million. This occurred because of a decline in users and hours engaged from its mature North America segment. Roblox did get a huge one-time bump from the COVID-19 lockdowns that is likely normalizing as the United States economy has reopened. In other regions, where the Roblox platform is new to consumers, it is seeing very strong levels of growth. For example, the Asia Pacific (APAC) region grew daily active users (DAUs) 94% year over year and hours engaged 104%. This led to global hours engaged hitting a record 11.8 billion in the quarter.
New monetization opportunities but a stagnating user base
All of Roblox's gaming and virtual experiences are built by third-party studios with Roblox's development tools. It makes money when users buy Robux to spend on in-game items, which it shares with its developer partners. This should be a core driver of Roblox's business over the long term, and it should generally grow along with its user base. However, management said it now has an increased focus on building new revenue streams, likely because of the slowdown in bookings in the past few months. These include in-game advertising opportunities, similar to a social network, and sponsored listings when players search for games to join, similar to a search engine.
These monetization opportunities seem exciting, but a big concern with Roblox is its stagnating user base. In April, DAUs totaled only 53.1 million, down from 54.1 million at the end of the first quarter. In May, the trend worsened with only 50.4 million DAUs for the month. There is a bit of seasonality with the summer as kids spend more time outside or travel, but a declining user base is almost never a good thing. Hours engaged in May were also down to 3.6 billion from 3.8 billion in April.
The two most important drivers for Roblox's business are growth in DAUs and hours engaged. If the company can't convince people to spend time on the platform, it doesn't matter how profitable its new monetization strategies are.
Valuation isn't crazy
With the stock down so much, Roblox's valuation has gotten a lot more attractive. Over the past 12 months, the business has generated $520 million in free cash flow. With a market cap of $17.5 billion, which comes down to an enterprise value of $15.5 billion when subtracting out its net cash, the stock trades at a trailing price-to-free cash flow (P/FCF) of 30. This is slightly above the market average, but investors should remember Roblox continues to reinvest in its platform, which is masking its full potential to generate profits. Plus, tossing out its first-quarter results, Roblox has shown a strong ability to grow its top-line bookings number over the past three years. If that continues for the next three years and beyond, its P/FCF multiple will come down rather quickly.
The only question is, are its financials sustainable or a mirage from the COVID-19 quarantine?
So is the stock a buy?
I think Roblox stock is a buy if you believe DAUs and hours engaged will return to growth over the next two to three years. The company's business model of selling virtual currency is highly attractive, and it has a ton of potential in advertising and sponsored searches with how much time users spend on the platform. However, if you are uncertain about whether users will actually stick around, it's probably best to avoid buying the stock, even with shares down 70% this year.
