Roblox (NYSE:RBLX) has been one of the more fascinating stories in the technology and gaming sectors over the past year. RBLX stock soared to a peak of $140 in November as the company enjoyed incredible growth during the lockdowns.
That momentum has reversed, however. Now the shares are down over $100 from their peak, with RBLX stock closing yesterday at $36.68, representing a new, all-time, interday low for the shares.
It would be easy to pin all the blame for the stock’s slump on difficult market conditions. After all, tech stocks in general and the shares of video-game makers in particular are getting slammed However, Roblox has some specific problems that those who are bearish on it have identified.
In the increasingly specialized world of content, it’s advantageous to be very good at something in particular. Roblox ‘s specialty is games for kids. The company has incredible mindshare among children under the age of 13. Its products combine the creative impulse of Legos with dynamic, user-generated content.
Roblox focuses on creating a whole ecosystem rather than one particular game or a single genre. Consequently, players can have fun with Roblox regardless of what particular type of games they prefer.
The currency that players use to pay for objects in Roblox’s games enables the company to easily monetize its offerings. Roblox is able to obtain a great deal of revenue through its “Robux” while avoiding more intrusive monetization methods such as in-game ads or loot boxes. Since players and developers can make money from creating content for Roblox’s games, its adventures are constantly being updated.
Meanwhile, Roblox has become a top option for those looking to invest in the metaverse. Over time, Roblox may be able to drive engagement across all of its platforms, including its augmented reality offerings. Such a phenomenon would create a unique player experience, incentivizing consumers to spend more time playing the company’s games.
There are three major drawbacks to owning RBLX stock right now. First, its games have rudimentary graphics. Try the platform for yourself or watch videos of its games online. The company’s offerings look amateurish compared to what many other video-game makers can produce.
At times, Roblox’s simplicity enables users to easily design their own content. However, Roblox’s games tend to look ugly. Consequently, they won’t appeal to players who care at all about graphics quality.
That leads me to my next point. Specifically, it’s hard for Roblox to market its games to adults. Children play Roblox’s games a great deal and contribute a large amount of revenue to the company. However, they quickly become too mature for Roblox and switch to more sophisticated platforms. If Roblox wants to become an extremely popular metaverse or gaming ecosystem, it will have to make its games more appealing to teenagers and adults.
Finally, the company’s net income continues to be deeply negative, and at times it has struggled to even post positive quarterly EBITDA. Arguably, Roblox achieved widespread adoption among its core market during the pandemic, but it still can’t make money. If it cannot generate profits now, then when will it be able to do so?
The Social Community: A Double-Edged Sword
One of the most fascinating parts of the Roblox story is the social nature of its games. The company’s ecosystem is a massive multiplayer online environment, where thousands of folks interact with each other.
That can make the company’s games incredibly sticky and compelling, as users meet others that they like and want to keep interacting with inside Roblox’s games. With many top video games, once players “beat” i.e. master them, they move on to the next game. That pattern does not generate a great deal of engagement and revenues for game makers over the long term,. By contrast, if Roblox’s players form strong bonds with each other, they’ll keep playing the company’s games for a long time.
On the downside, however, scammers and predators seek to exploit large, highly engaged communities. That’s especially true when a bunch of children and teenagers are involved. Bears and short sellers have hammered Roblox for supposedly allowing sexual predators and other malicious actors on its games. Highly respected media outlets such as The Wall Street Journal have confirmed that Roblox has had some difficulties effectively moderating adult content.
Most social networks have issues with moderating content and deleting inappropriate posts as they grow. So Roblox’s problems in this area aren’t necessarily unique, nor are they a show-stopper for the company.
However, given the particularly young children that the company caters to, it will have to be extra careful when it comes to handling these issues. Any shortfalls on this front could have a devastating impact on its brand and parents’ trust in its games.
The Verdict on RBLX Stock
Given its lack of profitability and its financial metrics which are lackluster overall, Roblox is still a speculative stock. If you want to own it, you have to have faith in the company’s long-term concept and vision. In other words, you have to believe that the game will succeed despite its lackluster graphics.
However, with RBLX stock below $40 per share, the bulls can effectively argue that the shares’ risk/reward ratio is now reasonable. If Roblox can figure out a way to get adults to play its games and/or develop a real, satisfying metaverse experience, the stock could climb significantly.
The company has a large user base and many passionate fans. That’s not enough to make it a winner today, but it has some potential. Let’s see if the company can execute and improve its financial metrics.
On the date of publication, Ian Bezek held a long position in U stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.