Roblox (RBLX 2.19%) has been a divisive stock since its direct listing in March 2021. The bulls claimed its gaming platform would lock in younger users and blossom into a self-sustaining ecosystem, while the bears argued it was merely a fad that would burn itself out before ever turning a profit.

Roblox initially impressed the bulls. Its stock opened at $64.50 on its first day of trading and skyrocketed to an all-time high of $134.72 in November 2021. But concerns about a post-pandemic slowdown, rising rates, and other macro headwinds brought out the bears, and its stock plunged to the low $30s.

That steep decline burned a lot of investors, but Roblox's stock might look like a tempting turnaround play at these levels. To determine whether it's worth buying again, let's weigh three reasons to buy Roblox against three reasons to sell it.

A lineup of Roblox avatars.

Image source: Roblox.

The three main reasons to buy Roblox

Roblox's bulls will argue that the company is innovative, growing, and reasonably valued. Roblox's platform enables users to create games and experiences with a simple block-based system that doesn't require coding knowledge. They can share those creations with other users and monetize them with an in-game currency called Robux.

Roblox's simplicity made it popular with tween users -- especially throughout the pandemic as they spent most of their time at home -- and a promising place for brands to set up metaverse-based ads. It's also still gaining users at an impressive rate in a post-pandemic world: Its daily active users (DAUs) grew 24% year over year to 58.8 million in the third quarter of 2022, representing an acceleration from its 21% growth in the second quarter. Most of that growth was driven by those 17 to 24 years old (22% of its total DAUs), which indicates it's successfully expanding beyond its core audience of tween users. Its average hours engaged increased 20% to 13.4 billion, compared to its 16% growth in the second quarter.

As a result, its bookings (a more accurate gauge of its underlying growth than its revenues since it measures its direct Robux sales) increased 10% year over year to $702 million on top of its 28% bookings growth a year earlier. That growth also ended a two-quarter streak of declining bookings that rattled investors in the first half of the year.

That growth has continued into the fourth quarter. In the first 27 days of October, its DAUs rose 14% year over year to 57.8 million, its cumulative engagement hours grew 11% to 3.6 billion, and its bookings increased by an estimated 13%. Roblox didn't provide any exact guidance, but analysts expect its bookings to rise by 4% this year and 11% in 2023.

Based on those expectations and Roblox's enterprise value of $22.6 billion, it looks reasonably valued at seven times next year's bookings. At its peak last November, Roblox was valued at $76.1 billion, or 27 times the bookings it's expected to generate this year.

The three main reasons to sell Roblox

The bears will argue that Roblox's average bookings per DAU (ABPDAU) are still declining, its net losses are widening, and it hasn't proven its business model is sustainable yet.

Its ABPDAU fell 11% year over year to $11.94 in the third quarter, representing the metric's fifth consecutive quarter of year-over-year declines. That slowdown can be attributed to its higher mix of international users, who generally spend less money than its higher-value users in the U.S. and Canada. Roblox offset its declining ABPDAU by gaining more DAUs in the third quarter, but that's a delicate balancing act that could become difficult to sustain over the long term.

Meanwhile, Roblox's net loss widened year over year from $356 million to $643 million in the first nine months of 2022, while its total bookings rose less than 1% to $1.97 billion. Its developer exchange (DevEx) fees, or the real-world currencies it pays creators for trading in their accumulated Robux, are still a major weight on its bottom line. Its DevEx fees increased 17% year over year to $405 million in the first nine months of 2022 and outpaced its bookings growth.

Roblox sets the exchange rate between Robux and real-world currencies, so it could potentially narrow its losses by widening that gap. However, reducing Robux's value will also inevitably alienate its top creators -- which could indirectly curb its growth in DAUs and engagement hours. Another pressing issue is its stock-based compensation, which soared 89% year over year to $420 million in the first nine months of 2022. Unless Roblox can rein in those expenses, it will likely continue to burn hundreds of millions of dollars each year and prove that its business is unsustainable.

Is Roblox's stock worth buying?

Roblox would arguably function better as a division of a larger tech giant like Microsoft (MSFT 0.74%) -- which acquired the comparable game Minecraft eight years ago -- than a stand-alone business. So unless Roblox stabilizes its ABPDAU growth and narrows its losses, I can't consider it a turnaround play in this tough market for imperfect growth stocks.