Right now, there's no doubt that artificial intelligence (AI) is the hottest thing in the technology sector. It's rightfully taken the next-big-thing mantle on Wall Street. It's also seemingly made many investors forget about the last tech trend to have that informal designation -- the metaverse.
While it's hard to overstate the potential impacts of AI, it would also be a mistake to write the metaverse off as a fad that's already peaked. There are big opportunities for investors in the category.
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Roblox (RBLX 2.28%) has established itself as an early leader in the metaverse space. It operates a popular platform that houses thousands of distinct experiences and attracts tens of millions of users every day. Even better, the stock also looks like an under-the-radar play in generative AI.
With the company's share price still down 67% from its high, read on to see why Roblox is capable of delivering next-level returns for long-term investors.
"The next big thing will start out looking like a toy"
At first glance, Roblox may look like a simple video game -- and it's true that the online virtual world is most popular with children and young teens. But the platform is much more than might first meet the eye and has the potential to become one of the biggest players in entertainment and social media. As internet entrepreneur and investor Chris Dixon once said, "The next big thing will start out looking like a toy."
Roblox is a metaverse that houses a huge range of individual games and social experiences, and new content is being added to the platform all the time. Creators earn in-game currency that can be exchanged for real-world money based on user interactions with their creations, and this incentive structure has helped supply a steady stream of high-quality content capable of keeping engagement levels high and attracting new users.
At the end of last year, 70 distinct experiences on the platform had recorded more than a billion player visits. In this year's first quarter, total money earned by the platform's development community rose 24% year over year to reach $182 million. The company has created a thriving space for creativity, play, and social interaction, providing incentives that will help promote continued growth.
Roblox's AI opportunity is being underestimated
Roblox has been using AI for years to automate content reviews and improve the safety of its platform. Now, the company has started to roll out generative AI tools for creators.
The metaverse leader recently released a tool that allows creators to generate any type of 3D material in their virtual world by simply inputting a few words. It also debuted a generative AI tool for coding automation, making it easier to create and script on the platform.
Roblox has established itself as a go-to destination and source of income for a sizable group of online content creators, and generative AI has the potential to take experiences on the platform to the next level. The company's metaverse already has a heavy social component. With artificial intelligence providing new tools for creators and opening the door for average users to experiment with generative tech, Roblox has the potential to establish itself as a lasting leader in 3D content creation and bring new kinds of online social experiences to a massive audience.
A metaverse pioneer with proven staying power
Some narratives may be quick to paint the metaverse as a flash-in-the-pan fad, but Roblox has actually already demonstrated impressive longevity. First launched in 2006, the platform has persevered through thick and thin and built an impressive track record of growth.
The business did see drops in daily active users and anemic bookings and revenue growth last year as it lapped periods of pandemic-elevated performance. However, Roblox is once again increasing engagement and monetization at impressive clips.
Average daily active users on the platform rose 22% year over year in Q1 to reach 66.1 million, and total engagement hours expanded 23% to hit 14.5 billion. Thanks to the engagement increase, revenue climbed 22% compared to the prior-year period to hit $655.3 million, and bookings increased 23% to $773.8 million. Meanwhile, Roblox's operating cash flow climbed 11% year over year to come in at $173.8 million.
RBLX PS Ratio (Forward) data by YCharts. PS Ratio = price-to-sales ratio.
Admittedly, the company likely remains years away from shifting into profitability and posted a net loss of $268.3 million last quarter. But the company's asset-light business model and untapped monetization levers in advertising and other categories point to big profit potential for patient investors. The metaverse leader also has a strong balance sheet, closing out Q1 with roughly $2.1 billion in cash and investments equivalents net of debt.
With the company trading at roughly 7.9 times this year's expected sales, Roblox has a growth-dependent valuation and isn't a low-risk stock. On the other hand, the company's forefront position in the metaverse, strong business foundations, and underappreciated opportunities in AI make it a worthwhile buy-and-hold play for growth-focused investors.
