In 2021, Roblox (NYSE:RBLX) traded in a narrow range, finding support at around $75. RBLX stock broke out in November 2021, lifted by the ecstatic buying of Nasdaq stocks. The party proved short-lived in 2022. Roblox stock is down very far from its 52-week high. Bullish sentiment for the metaverse gave way to pessimism. Looking deeper at Roblox, its gaming platform user base may lose momentum.
Investors are hopeful that this gaming firm is not a fad. The company posted strong user engagement figures in February. This is despite difficult year-on-year pandemic comparisons.
Ups and Downs for RBLX Stock
Investors previously rewarded Roblox for its strong key metrics. Despite quarterly losses and no sight of profits shortly, its strong February metrics imply strong revenue growth ahead. Last month, Roblox posted daily active users of 55.1 million, up by 28% year-over-year. Users spent 3.8 billion hours engaged on the platform, up by 21% from last year.
Investors have some concerns to consider. Estimated bookings fell by 2% to 4% to $203 million to $206 million. In addition, average bookings per daily active user slumped by 24% to 25% year-over-year to between $3.68 and $3.74. Roblox is not alone in reporting weaker activity. NPD Group reported that video game sales fell by 6% Y/Y to $4.4 billion. Players spent less on video game content. This includes subscriptions and digital and physical copies.
The post-pandemic environment is a rising risk for Roblox and the gaming industry. Governments are adopting policies that accept people living with Covid-19. In an endemic scenario, people will spend less time sitting on the couch to stream videos. They will also play fewer games on the computer, consoles and mobile devices.
In response to the headwinds, markets lowered the price-to-sales multiple for RBLX stock. Investors considering shares at today’s prices have fewer downside risks.
Can Roblox Grow Its Platform?
Roblox investors need to believe that the platform is safe for children. The company offers ways for parents to protect their children. For example, parents may set restrictions on the linked Roblox account.
The platform will continue to appeal to more children. It offers a safe and entertaining place for them. In addition, Roblox is creating a metaverse platform that does not require its users to buy expensive hardware to participate. Conversely, in the PC market, gamers often expect 4K graphics resolution, low latency and high computing power. This comes at a high price.
Competitors are investing heavily in the metaverse. For example, Unity Software (NYSE:U) bought Weta to give developers movie-level visual F/X in games. Microsoft (NASDAQ:MSFT) is buying Activision (NYSE:ATVI) to compete with Meta Platforms’ (NASDAQ:FB) push to the gaming space.
The bubble in technology stocks ended late last year when governments indirectly declared the end of the pandemic. Companies are recalling people back to the office. Instead of investing in cloud solutions and upgrading their network infrastructure, employers will invest in the hybrid work environment.
Workers previously spared a few moments to play games at home. This time, they will spend more time commuting to work. Risks are rising that Roblox and other gaming firms will have fewer active users in 2022.
What’s the Fair Value of RBLX Stock?
Readers may apply a five-year discounted cash flow revenue exit finbox model to estimate Roblox’s fair value. The metrics in this table would imply a fair value of almost $60:
| Metrics | Range | Conclusion |
| Discount Rate | 11.5% – 10.5% | 11.00% |
| Terminal Revenue Multiple | 4.8x – 5.3x | 5.1x |
| Fair Value | $56.33 – $63.54 | $59.87 |
The forecast I created depends on the company growing its revenue by at least 20% in the next five years:
| (USD in millions) | Input Projections | |||||
| Fiscal Years Ending | 21-Dec | 22-Dec | 23-Dec | 24-Dec | 25-Dec | 26-Dec |
| Revenue | 1,919 | 3,095 | 4,643 | 6,035 | 7,846 | 9,415 |
| % Growth | 107.7% | 61.3% | 50% | 30% | 30% | 20% |
| EBITDA | -326 | 31 | 46 | 121 | 392 | 471 |
| % of Revenue | -17% | 1% | 1% | 2% | 5% | 5% |
Investors are ultimately asking for too much from such strong sales expectations. Furthermore, Roblox’s pivot from mobile games to a metaverse platform will need billions of dollars in research and development. The stock is giving investors enough discount at current levels to compensate investors for the risk ahead.
Roblox has a weak quality score.
According to these quantitative scores, investors are getting an expensive stock with limited growth ahead. Roblox is posting strong revenue yet expenses are also growing quickly. The company is unlikely to post profits in the next year. Markets are no longer forgiving for unprofitable companies.
Broken companies report strong revenue growth but keep losing money every quarter. Roblox needs to differentiate its mobile gaming platform against a crowded market. Meta Platforms anticipates its advertising business is broken. Moreover, Meta’s social networking sites are slowing, forcing the firm to embrace the metaverse. If it succeeds, it could take Roblox’s users.
Roblox looks like a relatively cheap stock. This is an illusion. The stock is sharply below its yearly high. Revenue growth remains strong and the user base activity is steady. Looking ahead, active users are spending less time on the platform. This may hurt its stock performance in 2022.
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.
