3 Reasons to Buy Roblox Despite the Economy Opening Up

There must be a temptation for investors to cash out on Roblox (NYSE:RBLX) stock, an online game platform that owes much of its recent success to the current crisis.

Roblox sign logo at headquarters
Source: Michael Vi / Shutterstock.com

After a harrowing 2020, the U.S. is gearing up to reopen finally. Understandably, investors are returning to more traditional investment ideas, and there’s some concern they will move away from stocks that benefited from people being housebound.

Roblox reported strong organic growth in the last year, and that momentum is expected to continue in the new year. For the first quarter of 2021, it forecasts revenue to double and daily active users or DAUs to grow in the range of 59% to 68% year-over-year.

A recent deal with toy company Hasbro (NASDAQ:HAS) has the investment world buzzing as well. We will explore more about the deal in the forthcoming paragraphs, but rest assured, the announcement further cements the company’s potential to expand into verticals outside of gaming successfully.

Overall, if you were thinking of exiting your position because of the recent selloff, you should hold that thought.

1. RBLX Stock Is on the Move

Several industries suffered a lot as a result of the pandemic. However, there are certain areas for which the virus acted as a tailwind. One of those areas is gaming.

Gaming stocks skyrocketed during the pandemic. Since people were stuck at home with little to do, we saw a sharp increase in the number of people spending their time online.

Roblox is a unique way to play this trend. The brainchild of serial entrepreneur David Baszucki went public in March 2021 via a direct listing on the New York Stock Exchange.

RBLX stock closed at $69.50 a pop on its first trading day, giving the company a market cap of $38.26 billion.

The fanfare is justified. Last year, the company reported an 82% jump in revenues to $923.9 million. In the first quarter of 2021, ROBLOX is forecasting revenues between $320 million and $335 million, representing growth of 98% to 107% compared to the year-ago period.

All in all, this is an exciting company that has a lot of revenue potential. Speaking of which.

2. The Future Is Bright

Valuing a stock like RBLX is a tough task. Most people would agree that the U.S. is finally turning the corner with respect to the pandemic.

When schools reopen and kids return to playing with their real-life friends, companies like ROBLOX are sure to feel the pinch. And management is cognizant of this fact.

“We headed into 2020 with strong organic growth, which was further bolstered by social distancing restrictions. As those restrictions ease, we expect the growth rates in 2021 will be well below the rates in 2020. However, we believe we will see absolute growth in most of our core metrics for the full year,” Michael Guthrie, Roblox’s Chief Financial Officer, said in the guidance statement.

Analyst estimates point towards a pretty stable growth pattern for the company moving forward. Considering the situation, it’s always best to take this with a grain of salt.

But I believe the bullishness has some merit. First, even though the pandemic will, hopefully, be a thing of the past in the forthcoming quarters, the habits we have formed have chances to endure past this crisis.

Hence, kids that had a lot of fun playing these games when everything was on lockdown may still find time to play these titles when restrictions are relaxed.

3. It Only Gets Better From Here

Chart shows the revenue estimates for RBLX stock
Click to Enlarge
Source: Chart by Faizan Farooque, data from S&P Global Market Intelligence

Social media gaming is a big industry. And it will only grow from here. According to one report, the market size for the global social gaming market stood at $78.92 billion in 2020 and is expected to reach $98.8 billion by 2024.

A big part of value investing is catching trends early. Now, granted, gaming isn’t exactly something new. But the business model employed by ROBLOX is certainly novel.

In many ways, Roblox is the gaming version of YouTube. Just like YouTube allows its billion-plus users to monetize content, Roblox users build games that other Roblox users can play.

The business model worked wonders for YouTube. There is no reason it should not lead to sustainable growth for Roblox. Analysts also think so, as you can see from the estimates in the chart.

Additionally, the company is thinking outside of the box. There is no better illustration than the recent Hasbro deal. Under the terms of the deal, the nearly century-old toy giant will create new Nerf and Monopoly products based on the video-game platform inspired by Roblox.

As kids head back to in-person school, investors looked forward to the company coming up with new ways to drum up cash.

The announcement signifies management is not resting on its laurels and is looking for partnerships to develop new revenue sources.

My Final Word

For me, the question is not whether you should buy this stock but when. Considering the outsized valuation, investors might be skeptical of investing when they know that school reopenings are around the corner.

To them, I will say fair point.

Shares are at an approximately 14% discount to their 52-week high but are still trading too close to their all-time high for my liking.

I would wait for the stock to fall a bit in the forthcoming weeks as the economy reopens. By the company’s own admission, the second quarter will be a stressed one.

So around that time, I expect markets to cool off and this stock to trade at an attractive valuation.

But make no mistake about it. RBLX one is a thoroughbred stock.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence.


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