What happened

Shares of video gaming platform provider Roblox (RBLX 1.35%) fell 27.9% in August 2023, according to data from S&P Global Market Intelligence. The plunge started with a disappointing earnings report. But should investors be worried, or is this just another speed bump on the road to long-term gains?

So what

Roblox missed Wall Street's consensus targets on the top and bottom lines by the smallest of margins. Analysts expected a net loss of roughly $0.45 per share on sales in the neighborhood of $785 million. The reported net loss came in at $0.46 per share. Revenue rose 22% year over year to $781 million.

High-octane growth stocks like Roblox tend to be judged by their ability to deliver growth in the right places. In this case, the number of daily active users (DAUs) rose 25% year over year but fell 1% from Q1. Hours of gamer engagement also declined quarter over quarter. These two essential barometers of Roblox's business success drove the stock 22% lower the next day.

A handful of analysts saw a buying opportunity in Roblox's lower share price, but those calls fell on deaf ears. A plethora of analyst firms lowered their price targets on the stock in response to the disappointing user trends. Noted short-selling outfit The Bear Cave added to Roblox's troubles two weeks later, alleging that some of its games facilitate child abuse. This report resulted in a 6% share-price drop over two days.

Now what

August wasn't this company's first rodeo. Roblox stock has been prone to wild swings in recent months, falling more than 20% in August and April but also rising by at least 20% in March and January.

So whether you're a game platform enthusiast or a bearish short-seller, you'll need nerves of steel to invest in this hyper-volatile stock. At the same time, Roblox operates in a cash-burning mode that makes many investors queasy.

Granted, the top line never stopped soaring, but the weak user metrics suggest that the revenue growth also might slow down in upcoming reports.

Undervalued growth stocks are right in my wheelhouse, and I tend to find my most profitable long-term investment ideas there. However, Roblox isn't showing me that it belongs in that category. Come back when the operating profit margin has stabilized, preferably together with more user engagement and a larger user base. Until then, I'm happy to stay on the sidelines.