Roblox (RBLX 1.35%) and Unity (U 3.47%) both help people create and monetize games with their game-development platforms. Roblox enables younger users to create their own games with a simple block-based system. They can share their games with other users and monetize them with an in-game currency called Robux. Unity is a more sophisticated game-development engine which is used to create more than half of the world's mobile, PC, and console games. It also enables its developers to monetize their games with integrated ads, in-game transactions, and other paid features.
Roblox and Unity aren't direct competitors, but they both grew rapidly during the pandemic as people played more games. That growth spurt coincided with the buying frenzy in growth and meme stocks, and Roblox and Unity both hit their all-time highs in November 2021. However, both stocks subsequently plunged about 80% as their growth cooled off and rising interest rates popped their bubbly valuations. Should you buy either of these out-of-favor gaming stocks as a turnaround play?
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Roblox is still growing, but its losses are widening
Roblox generates most of its bookings, or the value of all Robux sales on its platform, from tween creators and players instead of older users. Its platform grew rapidly throughout the pandemic as those tween users spent more time at home.
That's why its bookings soared 82% in 2020 and grew another 45% in 2021. But in 2022, its bookings rose a mere 5% after turning negative in the first half of the year. Between the third quarter of 2022 and the first quarter of 2023, its bookings growth accelerated again before decelerating slightly in the second quarter.
Roblox ended Q2 with 65.5 million daily active users (DAUs), representing 25% growth from a year ago, while its total hours engaged grew 24% to 14.0 billion. That growth was impressive, but its average bookings per DAU dipped 3% year over year as it relied more on overseas and older users to drive its DAU growth. Both cohorts are more difficult to monetize than its core audience of tween users in the U.S. and Canada.
That's troubling because Roblox still hasn't figured how to narrow its losses yet. Analysts expect its bookings to rise 19% to $3.43 billion this year, but its net loss could still widen from $924 million to $1.17 billion.
That's a grim outlook for a company which ended its latest quarter with over $1 billion in long-term debt and just $520 million in cash and equivalents. Roblox expects new communication features and integrated ads to gradually boost its bookings per user, but there's no proof it can put all those pieces together into a sustainable business model yet.
Unity overcomes some existential challenges
Unity's revenue surged 43% in 2020 and grew another 44% in 2021 as developers flocked to its platform to create and monetize new games. But in 2022, Unity's revenue only rose 25% as two fierce headwinds throttled its growth. First, the broader gaming market suffered a post-pandemic slowdown. Second, Apple's (AAPL -0.35%) privacy update on iOS, which enabled its users to opt out of data-tracking features, rendered Unity's advertising algorithms obsolete.
To reduce its dependence on the gaming market, Unity expanded into non-gaming markets like theatrical special effects, virtual and augmented reality, and the creation of "digital twins" of real-world objects. To address Apple's iOS changes, Unity merged with the ad tech company ironSource last November and rebooted its advertising business.
On a pro forma basis (including ironSource), Unity expects its revenue to rise 5% to 9% this year as the macro headwinds continue to throttle the growth of the gaming and advertising markets. Unity isn't profitable yet, but it's been reining in its spending to narrow its losses. Analysts expect it to narrow its net loss from $921 million in 2022 to $845 million in 2023.
Unity ended the second quarter with $1.64 billion in cash and equivalents, but it still had $2.71 billion in convertible notes on its balance sheet. Looking ahead, Unity expects the recovery of the gaming market, the stabilization of its advertising division, and the expansion of its non-gaming businesses (including its new Vision Pro partnership with Apple and the usage of digital twins in more industries) to drive its long-term growth.
The valuations and verdict
Both stocks look much cheaper than they did at the apex of the growth-stock rally. As of this writing, Roblox and Unity trade at five and seven times this year's sales, respectively. Roblox might initially seem like the better deal, but I believe Unity is the stronger buy because its growth trajectory is more sustainable. Unity's profitability could gradually improve as economies of scale kick in, and it expands its non-gaming tools, but Roblox still hasn't proven that it can ever generate a profit.
