Slowing Growth Means Game Over for Roblox Stock

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Like most names in tech, it’s been a tough past few months for Roblox (NASDAQ:RBLX). Since November, when meta mania sent it to as much as $141.60 per share, RBLX stock has experienced a more than 71% drop in price.

A child playing Roblox on a smartphone.
Source: Katya Rekina/ Shutterstock.com

But the virtual world operator’s extended plunge is not only due to changes in market conditions. Although a lot of its slide can be chalked up to rising interest rates, and the subsequent cycling out of richly-priced growth stocks, issues with the company have played a role.

Namely, concerns about a possible big slowdown in its growth. Some numbers presented for January 2022 could signal that significant deceleration could occur in 2022. On top of this, there’s the fact that, whether it reports high growth or not this year and the next, it’ll continue to report net losses.

Although not as pricey (on a price-to-sales, or P/S, basis) as it once was, the shift away from a “growth at any price” mentality among investors, plus increased concern about the growth deceleration, points to lower prices ahead for shares. That’s not to say it’ll drop another 71%. Still, the strong chance of further losses, while there are more promising opportunities out there, makes it a name to pass on for now.

The Rise and Fall of RBLX Stock

Roblox went public at the right time when it debuted on the New York Stock Exchange in March 2021. Surging on its first day of trading, and rallying against in early summer, enthusiasm for shares cooled a bit, until Facebook’s corporate rebranding as Meta Platforms (NASDAQ:FB) sparked the above-mentioned madness for metaverse-related stocks.

Given it was ahead of the curve in terms of building a virtual world, it’s no shock RBLX stock entered bubble mode thanks to this trend. From late October to late November, shares nearly doubled in value.

But since hitting its high-water mark, sentiment for it has changed in a big way. First, meta mania peaked. Investors realized it was wise to not price-in metaverse-related growth far before it happens. Then, the move out of growth stocks, and “risk-on” plays in general, ahead of the upcoming increases to interest rates.

Finally, a few weeks back, when Roblox reported numbers for the December quarter. For the last quarter of 2021, losses came in higher than expected. The company also missed on revenue, and on bookings. However, it was the preliminary data also provided in the report, for January 2022, that caused a negative reaction. Although daily active users (DAUs) and engagement were up moderately high amounts, revenue bookings came in at just 2%-3% year-over-year.

Shares Could Drop Again Due to Valuation Concerns

RBLX stock may be down massively from its highs. Yet that doesn’t mean that it’s become a bargain. At today’s prices (around $41 per share), it trades for 11.7x trailing twelve month sales. That’s a sales multiple more than double that of other video game companies, like EA (NASDAQ:EA) and Take-Two Interactive (NASDAQ:TTWO).

Sure, you may say comparing Roblox to EA and Take-Two is apples-to-oranges. Not because of the differing nature of their respective business models. Because both these are mature companies, while Roblox (presumably) is still in the high-growth stage.

Yes, sell-side estimates say sales this year will rise to $3.14 billion, from $1.92 billion last year. But as the company’s revenue for January 2022 came in at between $203 million to $206 million, or $2.43 billion-$2.476 billion on an annualized basis, top-line growth of around 28.75% (decelerating from last year’s revenue growth of 107.73%) may not be enough to support this valuation premium.

Especially as Roblox continues to report losses, and as rising interest rates bring down what have been historically high valuations for stocks. This could result in it taking another moderate dive before it finally bottoms out.

Stick to Other Hard-Hit Tech Plays for Now

Based upon the January preliminary data, for now it appears the bear thesis for Roblox is playing out. That is, after seeing its platform take off during the pandemic (when its main audience, kids, were stuck at home), things are slowing down. Lockdowns are long over, kids are back in school (and participating in outside activities).

Admittedly, I may be a bit hyperbolic when I say it’s “game over” for Roblox. It’s seeing big user growth among those outside its main demographic. As CEO David Baszucki argued last month on CNBC, many ways to monetize the platform remain untapped. These include in-game advertising and immersive shopping. Further monetization could pick up the slack from slowing user growth. It could also enable the company to get out of the red, another positive for shares.

Even so, shares will likely drop further, between now and when things begin to look up for it. With this, hold off on RBLX stock. Take a look instead at other opportunities among the hard-hit tech names.

On the date of publication, Thomas Niel 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.


Article printed from InvestorPlace Media, https://investorplace.com/2022/03/rblx-stock-slowing-growth-means-game-over-for-roblox/.

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