Investors aren't quite sure what to make of Roblox (RBLX -3.66%) right now -- at least, if the stock's knee-jerk reaction to its Q1 report is any indication. Shares initially sold off earlier this month in response to the earnings miss. But, having had some time to think about the company's year-over-year revenue growth during the quarter in question, the market then drove it higher by that day's close. The stock's made no progress since then, however.
In confusing instances like these, investors looking to make a decision about a particular stock should step back and take an honest look at the bigger picture. Anyone doing this with Roblox right now is likely to end up leaning -- surprisingly enough -- in a bullish direction.
Roblox is doing what other metaverses aren't -- or can't
Don't misread the message. Roblox still has plenty to figure out. Chief among its current challenges is its lack of net profitability against a backdrop of seemingly waning interest in the metaverse itself. Nevertheless, the company's numbers say Roblox is doing something right.
But first things first. On the off chance you aren't familiar with it, Roblox's roots are planted in the video gaming arena. The company launched back in 2006 as a platform offering gamers a variety of virtual online worlds in which to interact with other gamers. It's unlikely its founders knew at the time the idea would become a model for other such virtual spaces that would, in turn, eventually be considered the metaverse.
But the opportunity eventually felt so big that Facebook even changed its name to Meta Platforms back in 2021, underscoring the company's commitment to the idea. Since then, artificial intelligence rather than the metaverse has become the Meta's top priority, with its intended metaverse platform never quite taking the shape that seemed to be in the cards.
And Meta's effort to date isn't the budding metaverse industry's only letdown. Walt Disney's metaverse development efforts were shut down in March, according to The Wall Street Journal. Other virtual-world creations like Decentraland and the Sandbox are also struggling.
But Roblox is doing something right, despite the disappointing draw the metaverse has been thus far. The numbers say so. Take revenue and bookings as an example. The top line reached a record of $655.3 billion last quarter, while bookings -- use of the platform's virtual in-game currency -- reached a Q1 record of $773.8 billion. Note that both figures are part of bigger-picture growth trends.
Data source: Roblox. Chart by author.
The number of regular daily users as well as the collective number of hours these people played within the platform's various video-gaming rooms also hit record levels last quarter, of 66.1 million and 14.5 billion, respectively.
Data source: Roblox. Chart by author.
Given the data, it's arguable that Roblox is becoming -- or has become -- the preferred metaverse platform because it already serves the biggest number of people in the most open-ended, flexible environment. It's a dynamic, of course, that's self-fueling. People want to go where most other people already are.
It's not for everyone, but it's for some
So is Roblox a stock pick for everyone's portfolio? Nope, not even close. Loss-making companies are already difficult enough to own due to their volatility. Companies with increasing net losses despite sales growth -- like Roblox -- are even more difficult to stick with.
Indeed, thanks to rising developer-exchange fees, R&D, and administrative costs, Roblox's net losses are still growing year over year despite ever-improving operating cash flow.
Data source: Roblox. Chart by author.
Also note that Roblox's average daily revenue per user is shrinking rather than growing. Just bear in mind that this decrease may simply reflect advertisers' reluctance to spend aggressively when the economy is on an uncertain footing like it is now; falling daily per-user revenue can also be expected as its scale increases. At the same time, developmental spending will eventually cool a bit as the company scales up. Ditto for burgeoning administrative costs.
Data source: Roblox. Chart by author.
It also doesn't hurt the bullish case that corporations like Walmart, Nike, and Warner Music are just some of the names using Roblox as their preferred metaverse service provider. These partnerships don't just lend credibility to the idea that businesses can monetize the metaverse. They say that Roblox is able to reliably provide this sort of service to institutions.
Connect the dots. This particular metaverse platform is demonstrating persistent growth while others aren't. It may well be the last one standing after all the others have shut down. If you can stomach the risk and volatility inherent to companies that are currently in the red but have the potential to turn a profit in the distant future, Roblox may well be a worthy bet for a small portion of your portfolio.
