One of the most followed investors on Wall Street is Ark Invest founder and CEO Cathie Wood, who has built a series of exchange-traded funds (ETFs) that primarily hold technology stocks. There are a couple of key factors that separate Wood's funds from other passive investment instruments. For one, Wood invests almost exclusively in growth stocks. Additionally, unlike other investment funds, Ark publishes its trading activity on a daily basis.
By watching those updates, we can see that Wood has been scooping up shares in metaverse gaming company Roblox (RBLX 1.35%). Let's dig into what might be driving the recent activity and assess if Roblox looks like a good buy right now.
The business at a glance
Analyzing a company's financial statements is typically a good place to start when evaluating its performance. However, for Roblox, there are a number of operating metrics beyond the financials that may serve as a better proxy.
It is a gaming company, and thus it is important for investors to get a feel for user engagement. One way to measure how engaged users are is to look at the amount of time spent on Roblox. During its second quarter, ended June 30, users spent 14 billion hours on Roblox's platform. While this represented 24% annual growth, it was a sequential decline of about 4% when compared to the first quarter. Nonetheless, through the first six months of the year, users spent approximately 5 billion more hours on Roblox when compared to the first of half of 2022.
Another metric to take a look at is daily active users (DAUs). For the June-ended quarter, average DAUs increased 25% year over year to 65.5 million. Again, like hours spent on the platform, DAUs declined sequentially from Q1, by about 1%. Despite slightly lower hours and users quarter over quarter, it's hard to ignore a platform that has this level of engagement.
Roblox says it is witnessing growth in DAUs across every geographic region in which it operates as well as its two primary age-group demographics. In particular, the company says it is seeing robust trends in Europe and Asia as well as users over the age of 13.
Image source: Getty Images.
Tailwinds look promising
The metaverse -- where people interact virtually -- is in a really early stage. While it's not entirely clear how it will impact daily life, investors have gotten an encouraging preview of how seriously Big Tech is taking this new digital frontier.
Facebook and Instagram parent Meta Platforms, for instance, is investing aggressively in the metaverse. It has a series of virtual reality hardware devices, headsets that Meta markets under the brand name Quest. To get a glimpse of how big this business could become, consider that Meta is partnering with major semiconductor company Qualcomm to help power these devices.
Also consider that the largest corporation in the world by market capitalization has entered the picture. Earlier this year, Apple announced a VR headset as its latest innovation. While the jury is still out on how much demand there will be for the headset, investors should know that Apple isn't going at this alone. The company is working closely with another metaverse specialist, Unity Software.
The fact that behemoths such as Meta and Apple are both building gaming and metaverse applications and working with smaller, albeit important, players in the sector could bode well for Roblox in the long run as they can bring more people into the metaverse.
Does the valuation look attractive?
Cathie Wood's funds have been buying Roblox stock since 2021. In August and earlier in September, the funds made a series of notable purchases. In early August, Wood increased her position in Roblox by nearly 1 million shares across a two-day window. But more recently, from Sept. 11 through Sept. 25, Wood's total position jumped from 9.2 million shares to 11 million. Interestingly, these buys came at a time during which Roblox's share price declined from roughly $28.55 to $25.39. This is a classic example of buying the dip. Presumably Wood saw the drop in price as an opportunity to buy a strong stock for less.
Speaking of dips, consider that Roblox stock is trading about 80% off its three-year high. This isn't entirely surprising, though. Popularity in Roblox, and gaming in general, surged during the earlier days of the COVID-19 pandemic. As a result, the company's financial and operating profile experienced a pronounced uptick and the stock entered meme territory.
The impact of slowing growth can likely be best seen when analyzing the company's free cash flow. Roblox has gone from generating hundreds of millions in free cash flow on a quarterly basis to consistently experiencing outflows over the last year. While that may appear alarming, investors need to consider the bigger picture.
Roblox is still growing its user base at an impressive rate across geographies and age groups, and engagement on the platform remains sky-high. Even when the company was free-cash-flow-positive, hours engaged and DAUs were significantly lower than where these metrics measure today. As a gaming company, Roblox is not immune to the effects that inflation and high interest rates have on consumer spending decisions, but if you are bullish on the metaverse in the long run, then Roblox stock may look disconnected from the fundamentals, making now an interesting opportunity to buy shares.
