While the Nasdaq Composite index is up roughly 21.5% this year, it also remains down roughly 21% from its all-time high. Growth stocks are still in bear market territory, and many companies that saw big valuation boosts at the height of the pandemic continue to trade at massive discounts compared to previous highs.
In addition to bullish catalysts created by stimulus initiatives and low interest rates, many software companies saw engagement catalysts from shelter-in-place and social-distancing conditions. But as high inflation and rising interest rates caused investors to move out of growth-dependent companies, high-flying "pandemic stocks" saw their valuations crater.
While some pandemic stocks might never revisit their former valuation peaks, there are others that actually have a good chance of bouncing back and reaching new highs. Read on for a look at one promising software company that's still trading down 71% but has what it takes to help long-term shareholders build a fortune.
This category leader can crush the market
The metaverse has the potential to be a massive platform for entertainment and commerce and generate tons of valuable data. Within this category, Roblox (RBLX -3.66%) stands out as one of the most prominent and promising players -- and its beaten-down stock could deliver huge wins for patient investors.
If you hear that a child or teenager you know is playing Roblox, it's important to understand that this isn't just a single game. While the Roblox metaverse has a somewhat unified aesthetic across its incredible variety of content, the platform actually hosts a wide breadth of individual games and social experiences.
Users can create their own content on the platform and actually earn money when other users interact with that content. In the first quarter, the amount earned by creators on Roblox rose 24% year over year to reach $182 million, and monetization incentives mean that new games and experiences are being added to the platform all the time.
And beyond its core appeal as a gaming and socialization hub, Roblox also has the potential to evolve into a much larger, more encompassing media and content ecosystem.
Resurgent growth and huge potential still ahead
After some challenging performance comparisons and engagement headwinds in 2022, Roblox's business has returned to strong growth.
Daily active users (DAUs) on the platform climbed 22% year over year to reach a record 66 million, and total engagement hours rose 23% year over year to reach 14.5 billion. Meanwhile, revenue rose 22% year over year to $655.3 million, bookings increased 23% to reach $773.8 million, and operating cash flow climbed 11% to $173.8 million.
Roblox already has a sizable user base, but it still has huge potential for expansion over the long term. There are signs of some very promising adoption and engagement trends already unfolding.
It is most popular among children and teenagers, but the demographic composition in the platform is now aging up. Not only are existing users sticking with the platform as they get older, but new users from older age groups are also joining the platform. In the 13-and-up demographic, engagement rose 31% year over year. Meanwhile, DAUs in the 17-through-24 age bracket increased 35% year over year in the first quarter.
CEO Dave Baszucki sees a path to eventually reach 1 billion daily active users. While that target looks highly ambitious, it's certainly not impossible. Consider that Meta Platforms' Facebook currently has more than 2 billion DAUs. The tech giant is also willing to take on billions in losses on metaverse initiatives each quarter because it views persistent virtual worlds as the future of social media.
Despite being a much smaller company, Roblox is actually significantly ahead of Meta Platforms in many key aspects of developing a metaverse world.
Play the long game -- this growth stock could create fortunes
Despite trading down more than 70% from its high, Roblox continues to trade at highly growth-dependent multiples.
RBLX market cap, data by YCharts. PS = price to sales.
With a market cap of roughly $24 billion, Roblox is valued at more than 7 times this year's expected sales. Due to the company's deferred-revenue approach to recording sales, its revenue tends to lag behind bookings, so the valuation picture is actually a bit better than its forward price-to-sales multiple would imply. Still, this is the kind of growth-dependent stock that's best suited for risk-tolerant investors who are willing to play the long game.
On the other hand, Roblox has built an early leadership position in the metaverse, and it's just scratching the surface of a massive long-term opportunity. Younger generations are increasingly growing up, playing, and socializing in virtual worlds, and this trend is on track to have a transformative impact on entertainment and commerce in the coming decades.
