Roblox's (RBLX 0.84%) share price has been highly volatile. Over just 12 months, the stock has traded at a high of around $138 and a low of below $22. It is now at $32, still a 75% decline from its 12-month-high price.

While investors don't necessarily enjoy the volatile ride, the lower share price might be a good buying opportunity. But is it a good buy today?

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Image source: Getty Images.

Latest performance cooled down massively

Roblox delivered incredible numbers during the pandemic period of 2020 and 2021. Revenue almost quadrupled while adjusted earnings before interest, tax, and depreciation (EBITDA) more than tripled between the fourth quarter of 2019 and the fourth quarter of 2021. Solid growth in daily active users (DAUs) and higher average bookings per DAU contributed to the strong numbers above.

But as countries reopened and children returned to school, Roblox's performance turned for the worse. For example, booking went from a triple-digit growth rate to a decline in the first and second quarters of 2022. Fortunately, this negative growth only lasted for two quarters as Roblox reported a 10% increase in bookings in the third quarter. Still, the 10% growth was nothing in comparison to its performance during the pandemic periods.

Besides, even as Roblox's booking growth slowed and turned negative, it invested heavily in safety, infrastructure, and talent. Such investment was necessary to prepare the company for future growth when the headwinds recede, but kept the company in a loss-making position. Also, these investments exerted enormous stress on Roblox's free cash flow, which fell into negative territory in the second and third quarters of 2022. 

The silver lining was that Roblox had a solid cash position of $3 billion in cash and cash equivalents and only $1 billion in debt. With its strong cash position, it could afford to go on the offense, positioning the company for growth in the future.

Roblox's prospects in the coming years

It is no fun for investors to see the weak numbers that Roblox has delivered in the last few quarters since the reopening of global economies. Fortunately, there are signs that the worst may be over for the company.

To start, bookings in the third quarter resumed their growth trajectory (up 10%) after declining for two quarters. Operationally, the average DAU in the third quarter grew 24% year over year to 58.8 billion, which was a 13% improvement over the second quarter. Moreover, total hours engaged improved by 20% year over year, thanks to the growth of DAUs and more robust engagement per user.

The solid operational metrics in the third quarter continued into the fourth quarter. For the first 27 days in October, the average DAU improved by 14%, while engagement grew by 11%. Similarly, bookings grew by 13% during the period. In short, these green shoots indicated that Roblox was back to its growth mode, which would eventually translate into better financials.

Longer term, the bulls expect Roblox to benefit from the rise of the metaverse. Granted, it will take years before the metaverse industry becomes mainstream. Still, the opportunity could be huge, with J.P. Morgan estimating that the industry would be worth $1 trillion.

While it's unclear how long it will take for the industry to reach its prime or which company will emerge a winner in the long run, Roblox is working hard to maintain its top-dog position. To this end, the gaming company is investing heavily in technology and infrastructure, partnering with the best developers, and expanding into new cohort groups and geographical locations. The idea is to ensure that Roblox remains the preferred platform for stakeholders, now and in the future.

While these investments won't necessarily guarantee success, they keep the company in the game, so it should be among the first to reap the benefit when the metaverse reaches its tipping point.

An overview of Roblox's valuation

Roblox went public during the peak of the pandemic in 2021, which in hindsight, was a great time -- business was booming, and investors were in a risk-taking mode.

Understandably, the stock traded at sky-high valuation throughout the last two years. For perspective, Roblox's price-to-sales ratio reached a high of 44 while averaging 21 over the previous two years.

The fall in share price over the last few months brought Roblox's valuation down to a more reasonable level of around six to seven. On one hand, this is much cheaper than its historical levels. But it's far from a bargain level. For perspective, a top-notch technology company like Alphabet trades at a P/S ratio of less than five.

Roblox's valuation is lower, but probably not low enough to get investors too excited.

So is Roblox a buy now?

The short answer is it depends. For conservative investors looking to invest in a stable and predictable company, Roblox probably doesn't fit the bill. The company operates in a nascent industry with plenty of unknowns and is still unprofitable. It is just not a safe stock to invest in for now.

But for adventurous investors -- those willing to tolerate wild swings and potential financial losses -- looking for exposure to the metaverse industry, Roblox seems like a reasonable proxy.

Even then, it will be best to acquire Roblox's stock over time. Investors can initiate a starter position and add to it over time -- either when Roblox executes, when the stock valuation becomes more affordable, or both.