While Roblox might have the potential to become a long-term winner, there are still plenty of uncertainties ahead.
After reaching a 12-month low of below $25, Roblox's (RBLX 6.93%) stock price rebounded in the next few months to trade at $39 recently. The general strong momentum of the tech sector and its solid financial performance have been the main drivers of its stock rise.
But for those who missed the boat, is it still a good time to buy Roblox stock to capitalize on the upside swing? This article will try to answer that question.
Image source: Getty Images.
Roblox made a solid comeback
Roblox might have timed its public debut right, but it did not expect the volatility it had to endure in the following years. In 2021, when Roblox went public, demand for its services was at its peak since the COVID-19 pandemic significantly boosted its business. Revenue grew at triple digits due to solid bookings from users globally. People were excited, and investors expected Roblox to grow at elevated rates in the coming years.
However, the boom didn't last long as global economies reopened after the COVID-19 pandemic. Users returned to schools and work, resulting in weaker demand for Roblox's services. At its worst, bookings growth turned negative, and revenue growth fell to just 2% in the second and third quarters of 2022.
Fortunately, when the skeptics were celebrating with their right call, Roblox made a remarkable turnaround in its performance. Revenue growth returned to double digits in 2023, which continued in 2024. This strong financial performance was a result of its solid operational performance. For example, in the second quarter of 2024, bookings grew at double digits across all regions, daily active users (DAU) jumped 21% to an all-time high of 79.5 million,and hours engaged increased 24% to 17.4 billion.
In short, while the journey wasn't smooth, Roblox's solid performance suggests that the demand for its gaming services is not a fad.
Still, investors need more evidence of sustainable growth
While investors are probably less concerned about the viability of Roblox's business model today, many still find it challenging to assess Roblox's long-term prospects.
On the positive side, Roblox has a long-term vision of reaching a billion DAU, which is massive compared to its current DAU of around 80 million. To grow its DAU, it could continue to attract users locally and in overseas markets like India, and grow its older cohort groups. In the long term, it also counts on the ongoing development of the metaverse to expand its use cases so that more people can use its services to perform tasks beyond gaming, be it in education, entertainment, etc.
Still, plenty of risks could prevent the company from reaching its vision. Topping the list is the uncertainty of the development of the metaverse industry. Technology barriers, regulatory and ethical concerns, and uncertainties surrounding economic viability are some of the issues that could impact the development of this industry.
Moreover, as technology improves and matures over time, there is no guarantee that Roblox will remain the preferred platform. For example, while Alphabet's Google is the dominant search engine today, Yahoo! was the incumbent in earlier years. Similarly, Facebook (Meta Platforms) was a latecomer in the social network industry but outperformed its predecessors like Friendster and Myspace.
The silver lining is that building another platform like Roblox is not easy. Developing competitive advantages that the gaming platform enjoys takes years, billions, and plenty of luck, especially regarding network effects, both on the user level and in the content and developer community. Besides, if the metaverse industry lives up to its promise, the pie will be massive enough to accommodate multiple companies.
In short, tremendous opportunities are ahead, but whether Roblox can capitalize on them remains uncertain.
The stock is not cheap
One of the challenges in investing in promising technology companies is that investors usually have to pay up to buy the stock. And the same applies to Roblox. As of writing, it trades at a price-to-sales (P/S) ratio of 8.3. While this is lower than its five-year average of 14.9, it's not cheap if we compare that to other top-notch technology companies.
For example, Alphabet has a P/S ratio of 6.5. The latter is hugely diversified and profitable, while Roblox is narrowly focused on the metaverse and is unprofitable. In other words, buying Roblox stock today doesn't have much margin of error.
What does it mean for investors?
Roblox's recent performance suggests the company's business model is largely intact. Still, while there are good reasons to be optimistic about the company (and the metaverse industry), investors should remain cautious since there are still plenty of unknowns around the metaverse development.
And with Roblox stock trading at a premium valuation, it's hard to justify a buy for the stock even though it has some attributes of a potential long-term winner. It will be best to keep the stock on the radar for now.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Roblox. The Motley Fool has a disclosure policy.
