As I’ve written in previous columns about Roblox (NYSE:RBLX), there are some things to like about RBLX stock. That includes its rapid revenue and user growth, some of its games and its extensive use of developers.
Also worth noting is its shares are much more attractive now. They’re changing hands for just under $50, much lower than they were several months ago.
Still, some aspects of the company’s fourth-quarter results and guidance were less than optimal. I think a sizeable number of people on the Street have become overly enamored with Roblox’s largely illusory cash flows. And criticism of the company’s graphics by InvestorPlace contributor Ian Bezek have also made me more cautious about RBLX stock.
Q4 Growth Was Impressive, But Gains Are Slowing
Roblox again grew very rapidly in Q4, as its sales jumped 83% year-over-year (YOY) to $569 million. Additionally, its hours engaged climbed 28% YOY and its average daily active users (DAUs) jumped 33% YOY to 49.5 million.
However, those growth figures were significantly lower than Roblox’s full-year increases. For example, for all of 2021, the company’s revenue soared 108% while its bookings jumped 45%. Its average DAUs for the year rose 40% YOY.
Even more worrisome were the “metric estimates” the video game maker released for January 2022. In that month, the company estimated its total bookings rose only 2% to 3% YOY.
In January, its average bookings per DAU actually fell 22% to 23% YOY to a range of $4.02 to $4.08. Additionally, the company’s revenue growth slowed to 64% to 65% YOY, down sharply from 2021 and Q4.
A Possible Reason for Slowing Gains
I have a theory about this decline. Before the pandemic, I had not played any video games at home in about 30 years. However, I picked up a used console and some games to play when restrictions were put in place. As Covid fears eased, I eventually stopped playing them entirely.
I believe many other people with more disposable income had a similar experience, and this is impacting RBLX stock. Roblox likely picked up several of these users in 2020 and 2021. But in Q4 and even more so in January, they likely stopped playing its games as they pursued more social activities.
Because these individuals have much more money to spend than very young players, their departure likely had a disproportionate impact on the company’s revenue and bookings growth compared to its engagement gains.
Incidentally, assuming Roblox is a good representative of the metaverse and my hypothesis is correct, this trend is not a good omen. It could be a bad sign for not just the metaverse in general, but also related stocks like Meta Platforms (NASDAQ:FB) and Matterport (NASDAQ:MTTR).
Largely Illusory Cash Flows and Poor Graphics
A number of pundits have praised the company’s cash flows, as it reported net cash provided by operating activities of $122.2 million. But a look under the hood indicates this will probably not boost RBLX stock.
Like many other unprofitable tech companies these days, the company is issuing a great deal of stock to pay its employees. Last quarter, for example, its stock-based compensation came in at $120.2 million. Add to that its Q4 “developer exchange liability” of $46.2 million, and Roblox’s operating cash flow turns decidedly negative.
Huge amounts of stock-based compensation allows companies to technically say they are profitable or nearly profitable on an adjusted basis, or that they’re cash-flow positive. But it’s a huge negative for shareholders. That’s because companies inevitably push down their stock prices with this practice.
I believe huge stock-based compensation totals often stop shares’ rallies. Common sense suggests that, as soon as a stock’s price jumps, many of the employees who own shares and have been waiting to cash out will do so. That could partially explain why none of the rallies in RBLX stock this year has been sustained for significant amounts of time.
Finally, InvestorPlace columnist Ian Bezek recently wrote, “The company’s offerings look amateurish compared to what many other video-game makers can produce.” Ominously, he added, “However, Roblox’s games tend to look ugly. Consequently, they won’t appeal to players who care at all about graphics quality.”
The Bottom Line on RBLX Stock
Roblox’s January bookings and revenue numbers are very bad signs for its stock. Additionally, as more people realize stock-based compensation is keeping the shares down, shares are likely to drop further. Its metaverse ventures might also prove to be less lucrative than expected.
Finally, if Bezek is right about the graphics in its games, Roblox will probably have a very hard time keeping older teenagers and adults hooked. Consequently, I recommend selling RBLX stock.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.