Want to Invest in the Metaverse? Pick Roblox Stock Over Meta.

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When Chief Executive Officer Mark Zuckerberg announced Meta (NASDAQ:FB) as the new name for Facebook, it validated Roblox’s (NYSE:RBLX) business model. RBLX stock closed at $78.36 on Nov. 11, up 13% year-to-date.

Roblox Stock IPO

Source: Miguel Lagoa / Shutterstock.com

The prospects of a metaverse are very real. Virtual worlds have been around for many years. Companies also spent time developing virtual reality hardware. While Facebook wants to promote a Meta world and its Oculus headset, RBLX stock may benefit as investors scramble to pick the winners.

In the context of its platform, what are Roblox’s prospects?

RBLX Stock Is Very Hot

Roblox is an online gaming platform and game creation system. Users program games that other users can play. While Facebook touts its “Meta” rebrand to reflect its commitment to fitness, games and the office, Roblox is a pure-play meta investment. Since its direct listing starting at $45, RBLX shares soared to over $100 only to stumble. The stock could break out of its trading range on the market’s euphoria for Meta.

Disciplined investors may want to wait until after the company posts its third-quarter earnings on Nov. 8, after the market closes. Last quarter, Roblox posted revenue growing by 127% to $454.1 million. Yet the firm lost $140.1 million. Bookings also rose by 35% to $665.5 million. This is too weak for a company whose stock price trades at a price-to-sales of 32 times. By comparison, Electronic Arts (NASDAQ:EA) trades at a 7 times P/S. Activision Blizzard (NASDAQ:ATVI) also trades at similar multiples. Both firms release blockbuster gaming titles several times a year.

Roblox has a popular platform and a growing user base to almost justify the valuation. Still, average daily active users was up 29% Y/Y to 43.2 million. DAU outside of the key U.S./Canada market drove the growth. But since average bookings per DAU in July (at $4.75 – $4.81) are down by 5% to 7%, investors should not hold a big position in the stock yet.

The Roblox Opportunity

Roblox wants to expand beyond its core gaming business. Roblox’s leaders may add more virtual experiences for users. For example, it could offer models of historical cities. It might even offer let users explore imaginary or fictional places.

New developers may learn how to make games on Roblox’s platform. They may teach themselves how to program in Lua, an open-source language. And because it costs nothing, Roblox may attract many new game makers to its platform. Roblox added extensions to Luo to prevent developers from using its tools on another platform.

At its annual developer conference, Roblox’s co-founder and CEO, David Baszucki, said it would liven play avatars. It will also support in-game monetization streams. That would help developers make more money sooner. The company will migrate from offering low-level gaming graphics to play avatars that are both customizable and more life-like.

Roblox has a good chance of developing realism to the environment and the avatars sooner than Meta. As the social networking site spends billions and gets nowhere, it may have to acquire Roblox.

Valuation of RBLX Stock

In a base case scenario, readers may build a five-year discounted cash flow growth exit model. Here are the metrics that would suggest that Roblox is trading at close to fair value:

Metrics Range Conclusion
Discount Rate 7.5% – 6.5% 7.00%
Perpetuity Growth Rate 3.3% – 4.0% 3.50%
Fair Value $67.93 – $109.37 $80.78

Model courtesy of finbox

Readers may assume revenue growth rates declining steadily. This would factor a post-pandemic world where people spend less money online. Competition from established gaming firms would also pressure Roblox’s revenue:

(USD in millions) Input Projections
Fiscal Years Ending 20-Dec 21-Dec 22-Dec 23-Dec 24-Dec 25-Dec
Revenue 924 1,417 2,055 2,877 3,970 4,963
% Growth 81.70% 53.40% 45.00% 40.00% 38.00% 25.00%
EBITDA -222 626 883 1,266 1,985 2,233
% of Revenue -24.10% 44.10% 43.00% 44.00% 50.00% 45.00%

Model courtesy of finbox

In the above scenario, Roblox’s revenue would slow to 25% by 2025. Conversely, management will invest heavily to attract more users. This would prevent Roblox from posting a slowdown in revenue growth. It would also imply a higher fair value than Roblox’s current stock price.

Your Takeaway on RBLX Stock

Meta investors may consider holding a handful of gaming stocks. Roblox, whose metaverse is under constant development, may lose money in the near-term. This may pressure the stock price. Still, market euphoria may take over. Roblox could get a lift as speculators bet on a Roblox buyout from Facebook or investments from the social networking giant.

Roblox does not trade at a discount for a good reason. Its platform attracts players and developers. This is not slowing down, either. More gamers will join Roblox, increasing the brand value. As user activity grows, advertisers will spending on the site. Game players will spend more on in-app purchases, rewarding developers. Developers will earn more revenue and will make more products on the platform.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get actionable insight to achieve strong investment returns.


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