Roblox (NASDAQ:RBLX) stock has collapsed in recent months for a variety of reasons — both general and specific. RBLX stock is down 47% from its all-time high, made in November, and 27% in 2022 alone.
The general reason for the downdraft in RBLX stock is the selling hitting most growth stocks. Even with shares approaching the $75 level, investors are paying 16 times expected 2021 revenue for a video game company. Roblox invests ahead of its growth, with about $5 going out for every $4 coming in.
That wasn’t a sin last year where growth was rapid. Analysts are calling for revenue growth of more than 195% for 2021. But in 2022, investors want to see profits, or at least profitability, so RBLX stock is suffering.
The Specific Reasons RBLX Stock is Struggling
Roblox, founded in 2006 to teach children the rudiments of programming, is now being accused of exploiting those children. It had over 200 million players as of April. Many are kids. Many of those kids are highly creative. Some of those creative kids have built valuable virtual property. They can get paid in Robux, whose value the site shares. They can buy and trade avatars in an unregulated market. They can also get roped into making money for adults without financial protection.
The result is “the metaverse” everyone on Wall Street and in Silicon Valley is talking about. Virtual worlds, with real people behind them, are creating and profiting from new kinds of interactions. Roblox CEO David Baszucki talks about keeping children safe in this new environment. Critics wonder if that’s possible.
Then there’s qualified small business stock (QSBS), a tax loophole Baszucki and his relatives have been using. It’s legal. But in the present political environment, it’s also seen as something of a scam. It’s another black eye for a company that doesn’t need one.
Should You Buy the Dip in RBLX Stock?
Roblox came public through a direct listing on March 10 at $64.50. Shares closed their first day of trading at $69.50 and briefly breached $100 in June before falling back.
A second boom was sparked by a November earnings report that showed third-quarter revenue more than doubled from a year earlier. RBLX hit a high of $141.60 on Nov. 22. It’s been mostly downhill since then. Still, if you got in on the IPO, you’re up about 17%.
On the other hand, the price-to-sales ratio is still extraordinarly high and there are no profits on the horizon. Just saying it’s down on short-term concerns doesn’t dispel those concerns. Neither does the fact that Cathie Woods’ ARK Investment Management “bought the dip.”
The fundamental question is the value of Roblox in a world where money costs money. The Federal Reserve may raise rates four times this year. Trillions of dollars will be seeking safety from inflation.
Bulls argue that the rush of brands like Netflix (NASDAQ:NFLX) and Nike (NYSE:NKE) to Roblox proves its value. They say the growth in daily active users justifies the company’s valuation.
The bulls also say Roblox’s success in building a virtual world, with its own currency and rules, makes it the ultimate metaverse play. If this dip is going to persist, then shouldn’t a giant company focused on that metaverse, like Meta Platforms (NASDAQ:FB), make a bid for it?
The Bottom Line on RBLX Stock
Roblox has been successful in building a gaming platform using simple tools, one that is engaging to millions. But that isn’t the metaverse.
Augmented reality, in which computer-generated content is layered onto real scenes, is different. Virtual reality, computer generated content indistinguishable from lived reality, is different.
Roblox is a very early version of what’s possible. It has benefitted enormously from the pandemic keeping people inside their homes. But Roblox hasn’t even proved it’s not the latest Pokemon Go yet, let alone that it’s ready to dominate the tech universe.
I may be wrong, but I’m leaving it to the kids.
On the date of publication, Dana Blankenhorn held no positions in any company mentioned in this story. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.
