A couple of years ago, the term "metaverse" entered the mainstream and became a source of clickbait for investment journals. The metaverse, in simplest terms, is a persistent, immersive, 3D virtual world that people can access by using virtual reality (VR) and augmented reality (AR) headsets.
While this may sound a bit like science fiction (and it should, as the origin of the concept and the word "metaverse" came from a 1990s sci-fi bestseller), there are actually several exciting use cases for this technology. One company seeking to capitalize on the rise of virtual reality, and its overlap with gaming and the nascent metaverse, is Roblox (RBLX 1.35%).
Though Roblox's stock price gained a generous 54% year to date, the company still trades at a steep discount to the all-time high it reached in November 2021.
Several exciting tailwinds should fuel higher engagement on Roblox's platform. Let's dig into what the company has to offer and whether the stock is worth considering for your portfolio.
A hard look at the numbers
In the first quarter, Roblox generated total bookings of $774 million, which was 23% higher year over year (and 25% higher on a constant-currency basis). Per management's commentary on the earnings call, the year-over-year changes in bookings for its past five quarters were as follows: -3%, -4%, 10%, 17%, and 23%. This accelerating bookings growth can be more easily digested when looking at the company's revenue and cash flow profiles.
For Q1, revenue came in at $655 million, an increase of 22% year over year (or 24% on a constant-currency basis). Additionally, the company's operating cash flow increased by about 11% to $174 million. To get a more thorough understanding of Roblox's business, it is important to look beyond traditional financial statement figures.
Two important performance indicators to keep an eye on are daily active users (DAU) and hours engaged on the platform. In Q1, average DAUs were 66 million, an increase of 22% year over year. Moreover, hours engaged skyrocketed 23% to 14.5 billion. That's a lot of time spent on video games.
While accelerating user engagement is leading to higher revenue and cash flow, Roblox's future looks even brighter when taking into account it's working with some of the largest tech companies, including Meta Platforms.
Image Source: Getting Images
A lot of exciting tailwinds
In early June, Meta Platforms shared that it will be releasing a new headset in its VR family of products. Of note, this announcement came just days before rival Apple confirmed the rumors and announced a VR product of its own.
In early July, Roblox announced it will be adding Meta's VR product, the Meta Quest, to its existing compatible platforms such as desktop computers, mobile phones, and Xbox. Per the company's press release, Roblox will be on Meta's Quest Pro and Quest 2 devices. Given this is a new platform for Roblox, it's not surprising that the soon-to-be-released Quest 3 device was left out. Nonetheless, this is still very exciting for Roblox, as it effectively marries Roblox's 66 million DAUs with Meta's gaming ecosystem.
In addition to its work with Meta, Roblox also has some under-the-radar use cases when it comes to artificial intelligence (AI). On the earnings call, Roblox CEO David Baszucki explained how the company is using generative AI to help gaming creators develop output more efficiently. He explained that developers can describe objects that they want to build, and Roblox's AI can create 3D renderings of them. Another exciting development is Roblox's ability to leverage its historical code base. Baszucki explained that AI can now help developers write software more quickly by auto-completing or suggesting code.
Should you buy the stock?
Given that Roblox is not yet profitable on a GAAP basis, one can't use the price-to-earnings ratio as a valuation benchmark. But the price-to-sales ratio can still be helpful when comparing comparable companies. As of the time of this article, Roblox trades at 11.5 times its trailing 12-months sales. By comparison, another gaming company, Unity Software, trades at 10.2 times trailing 12-months sales.
While Roblox trades at a slight premium to its peers, the tailwinds of artificial intelligence and deepening its partner network with Big Tech could be lucrative catalysts for the business. One course of action for investors would be to dollar-cost average their way into a position in the stock over time. Despite its run so far throughout 2023, there appears to be a lot of upside in Roblox stock.
