Based in California, Roblox (NYSE:RBLX) provides gamers with a fun, immersive and interactive platform. This might sound like a high-potential niche market to invest in. However, it appears that some overeager folks are trading RBLX stock as if it’s a video game. It’s definitely not a game, and investors should check Roblox’s financial metrics before taking a position.
During the Covid-19 pandemic boom of 2020, it certainly seemed as if video games were a recession-proof industry. Yet, the 2020 recession was unique with its lockdowns and high unemployment rate. Folks were stuck indoors with not much to do, so they took to gaming as a diversion.
That was great for Roblox and its shareholders. Fast-forward to mid-2022, however, and we might be entering into another recession. This time around, conditions aren’t as favorable for Roblox, and the data shows this. Consequently, aspiring meme-stock traders are taking on too much risk if they invest in Roblox now.
RBLX Stock Gets a Boost, But Is It Justified?
Don’t get the wrong idea. Some highly sophisticated traders might be able to flip RBLX stock for short-term gains. Holding the shares for a while, however, is a dangerous proposition.
It certainly appears that traders are trying to “game the system,” so to speak. For example, on Sept. 7, Roblox shares shot up 7.7% after the company announced that it will embed advertisements in its immersive gaming experiences.
This was an exaggerated single-day move for RBLX stock. Traders were pricing in a best-case scenario in which Roblox users would fully embrace ads. Yet, that’s not a reasonable assumption.
After 15 years, Roblox’s users have undoubtedly become accustomed to gaming without the annoyance of advertisements. Besides, since so many of Roblox’s users are children, it’s controversial to embed advertisements. According to Bloomberg:
“In April, advertising watchdog Truth In Advertising sent a complaint to the US Federal Trade Commission arguing that ‘Roblox has failed to establish any meaningful guardrails to ensure compliance with truth in advertising laws.'”
Roblox Fell Short on This One Key Metric
While some traders might treat RBLX as a fun meme stock, they’re probably not paying much attention to Roblox’s financial and operations stats. That’s unfortunate, as some of the company’s fiscal figures are worrisome.
Among the most important metrics for a video game business is bookings. Roblox defines bookings as “revenue plus the change in deferred revenue during the period and other noncash adjustments.”
Roblox had already reported a decline in booking during 2022’s first quarter. So, the company really needed to show improvement in this area during the second quarter.
Unfortunately, Roblox posted another quarterly decline, with Q2 2022 bookings falling 4% year-over-year (YOY). Not only that, but Roblox’s average bookings per daily active user dropped 21% YOY.
Furthermore, Roblox announced a second-quarter earnings loss of 30 cents per share. That’s even worse than the already downbeat Wall Street forecast of a loss of 25 cents per share.
What You Can Do Now
Roblox is an unprofitable business with declining bookings. Hence, if you’re taking your investments seriously, you should consider staying away from RBLX stock.
As for the meme-stock traders, you might be able to profit from short-term trades with Roblox shares. Just be sure to have an exit strategy, and understand that meme-stock investing isn’t a game that most people should play.
On the date of publication, David Moadel 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.