Roblox (RBLX -2.25%) has been a hot topic lately due to its leading position in the metaverse industry.
While the bulls cheer the company for its potential, the bears are concerned that the metaverse might just be hype that will fade over time.
Here, we will explore the points from both sides before deciding whether Roblox's stock is a buy.
Image source: Getty Images.
What to like about Roblox
Roblox is riding on a colossal metaverse trend -- according to a report by JP Morgan, the market opportunity is estimated at over $1 trillion in revenue. While the industry is relatively young, Roblox has been operating in it for years, giving the company a competitive edge against its peers.
First, Roblox has a solid community of developers and a massive user base. With this vast user base, Roblox has no problem attracting and retaining the best game developers to build high-quality games for users. These high-quality games, in turn, attract even more users to Roblox's platform.
Additionally, Roblox's platform has a social element allowing users to invite their friends, further contributing to its growth. As the user base grows, Roblox monetizes the community by having a share of the developers' income and charging a commission on conversions of Robux, the currency used on Roblox's platform.
In other words, Roblox has a proven growth playbook that has already shown impressive results, with revenue growing by 292% from $147.6 million in the fourth quarter of 2019 to $579 million in Q4 2022.
Roblox's challenge is maintaining the virtual cycle of ever-growing developers, high-quality content, and user base. If the company can execute this strategy, it has an excellent chance to continue its growth for years. To this end, it is also helpful that the company has a solid cash position ($3 billion), giving it plenty of firepower to invest in growth.
What not to like about Roblox
Despite all the excitement around the metaverse, it remains an emerging industry that has yet to reach the mainstream. Thus, one of the most significant risks is whether the industry can grow to its full potential in the coming years. Market participants must solve many problems across technology, regulations, business model, and more before they can reap the benefits.
Herein lies the issue for Roblox. Even after operating its platform for over a decade, the company remains unprofitable. In fact, its net loss in 2022 almost reached $924 million as it accelerated its investment to grow the business. In other words, we don't expect the company will turn profitable anytime soon.
On top of that, Roblox's stock has a premium valuation of more than 10 times in its price-to-sales ratio. Meta Platforms, the social networking giant heavily invested in the metaverse, has a P/S ratio of lower than 5. And unlike Roblox, the latter is a hugely profitable company.
If Roblox fails to meet its high expectations, the stock valuation could plummet, reflecting the new reality. Moreover, as the technology industry is prone to disruptors, other competitors could potentially unseat Roblox from its current market position. For instance, Alphabet's Google displaced Yahoo as the dominant search engine despite the latter's initial success and significant head start.
All said, investing in Roblox (and the metaverse) is far from a sure thing.
So is Roblox stock a buy?
Roblox is a leading player in the emerging metaverse industry, with a proven playbook to execute its growth.
However, there are risks involved in investing in this emerging industry, including the possibility of the metaverse not reaching its full potential and competitors unseating Roblox from its current position. Additionally, Roblox's stock is priced at a premium valuation, giving investors no margin of safety.
In short, I don't think Roblox stock is a buy now. At most, investors can consider keeping the stock on their watch list.
