Remember when the metaverse used to be the hottest trend on Wall Street?
That was just a few months ago, in late 2021. Facebook changed its name to Meta (NASDAQ:FB), metaverse gaming giant Roblox (NYSE:RBLX) reported record-breaking holiday numbers, 3D imaging company Matterport (NASDAQ:MTTR) was the best-performing small-cap growth stock, and metaverse gaming engine Unity Software (NYSE:U) was flying high on strong operational results.
How things have changed in such a short time…
Since then, all four of those stocks have been crushed.
Meta stock has shed 45% after the company reported miserable fourth-quarter numbers. Unity stock is off 49% — even though it shared a great quarterly. Roblox stock is off 60%, thanks to a big slowdown in its business in early 2022. And Matterport stock has plunged 80%.
This vicious price action in metaverse stocks over the past few months warrants an honest question. Did the metaverse die before it even got started?
No, the metaverse is not dead. It’s just going through growing pains. The trend of humans going from 2D to 3D internet applications and platforms remains very much alive and well.
Within the next two years, we’re all going to be buying virtual reality (VR) headsets. Within five years, we’ll all be attending virtual concerts and going to virtual bars. And within ten years, every company will be using metaverse technology to create virtual offices and factories.
Nothing about that future has changed. Long-term, metaverse stocks will be just fine.
But in the near term, some metaverse stocks may struggle. And one we’re concerned about is Roblox stock.
Roblox Stock Will Struggle
To be clear, we are very bullish on Roblox stock in the long run. It’s a holding in our flagship Innovation Investor portfolio. The company is cementing itself as an early leader in pioneering and defining the metaverse through partnerships, virtual concerts, and more.
By 2030, we believe over 250 million people will be interacting on Roblox daily, using virtual avatars to play games, attend concerts, and go shopping. Roblox will be the new social media.
Long-term, Roblox stock has tremendous potential.
However, Roblox reported quarterly numbers last week. And that report made one thing clear. The pandemic is over, and kids are spending more time on the real-world playground.
Long story short, Roblox’s user growth has decelerated from 35% in November to 33% in December to 32% in January. Average hours played per day by those users has been falling at a 2- to 5% pace every month over the past few months. And average bookings per user fell 9% in November, 10% in December, and 22% in January.
The company’s key performance metrics are going the wrong way. User growth is decelerating. Engagement growth is falling. Unit revenues are dropping in the wrong direction.
In simple terms, Roblox stock will not work so long as these key performance metrics are trending in the wrong direction.
Unfortunately, management essentially said on the conference call that they will continue to trend in the wrong direction for a few months. And therefore, over the next few months, Roblox stock may struggle.
For long-term investors, this doesn’t matter. We see Roblox as a $200 stock one day. A minor slowdown here in the first half of 2022 doesn’t impact that long-term price target.
The Final Word
But if you’re invested in Roblox stock, you should be prepared for more volatility in the near term.
That’s why, in our Innovation Investor product, we recently moved Roblox stock to “Hold.”
In that advisory, we have a whole portfolio dedicated to metaverse investments. And quite frankly, we believe the other metaverse stocks in that portfolio are better buys than Roblox stock at the current moment.
Again, nothing against Roblox stock — long-haul, it’s a winner. But the other stocks in our metaverse portfolio have more upside potential both near- and long-term.
We’re doubling down on those stocks at the current moment, so don’t wait to find out their names and ticker symbols.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.