Is Roblox Stock a Buy? Gaming platform Roblox (NYSE:RBLX) is among a group of exciting next-generation tech stocks that experienced enormous selloffs in 2022. The share price currently trades under $35, down from a 52-week high of over $80.
As such, many growth investors are eyeing Roblox as a potentially oversold value buy. But is it?
For those unfamiliar with the company, Roblox operates an online gaming platform that allows users to create their own games and 3D content. According to Roblox itself, the company’s user baser base includes millions of developers worldwide who use Roblox Studio to create and publish immersive 3D games.
Due to its user-generated gaming model, Roblox is also closely tied with the emerging metaverse market. The Roblox platform is a practical and accessible solution for individuals and companies to use in creating their own metaverse applications.
If the metaverse is, as predicted, the future of the internet, there’s a good chance that Roblox could become one of the key tools used to build it.
Will The Metaverse Stem The Tide?
In Q3, Roblox reported a 2 percent year-over-year revenue increase to $517.7 million. Bookings rose 10 percent to $701.7 million. Free cash flow, however, was discouragingly negative at $-67.7 million.
Roblox also significantly underperformed expectations in terms of earnings. For Q3, the company reported a loss of $0.50 per share. While analysts had expected a loss, the consensus estimate pegged that loss at $0.36 per share. The Q3 earnings extended a losing streak that is expected to hold in Q4 and throughout 2023.
In the coming 12 months, Roblox’s earnings are expected to slide more deeply into the red. The company is expected to lose $1.92 per share, down from the $1.58 per share loss of the trailing 12-month period.
There were, however, some positive indications on the growth front in Q3’s report. Daily active users increased by 24 percent year-over-year, and hours of engagement increased by 20 percent. These metrics demonstrate the popularity of the Roblox platform, though not necessarily its ability to translate that popularity into positive future earnings.
Bulls point to future growth developments to justify purchasing Roblox. The company is expected to introduce in-game advertising sometime this year, potentially increasing its total sales.
Roblox has also succeeded in cultivating an audience of older gamers who have more money to spend on premium gaming experiences. The growth of the metaverse market, a key component of Roblox’s long-term investment thesis, could also result in higher share prices over the next several years.
Analysts Disagree Widely On Fair Value
Analysts expect Roblox to remain largely flat this year. Analysts target a consensus of $32.50, slightly below the current price of $33.19.
It should be noted, however, that analysts have projected prices ranging from $14 to $54. Given this wide divergence of views on the stock’s near-term future, investors should be wary about placing too much trust in these price targets.
Roblox also appears to be significantly overvalued at today’s prices. The company trades at more than 40 times its book value and 8 times its sales.
With earnings expected to decline further in the coming year and the company leveraged with more than twice its equity in debt, Roblox is unlikely to attract value investors. Roblox’s debt load could also make it susceptible to higher interest rates, which are expected to persist throughout 2023.
Is Roblox A Bet On Metaverse Hype?
The single biggest risk factor for Roblox is its dependence on the gaming and metaverse markets, both of which have proven much shakier than expected over the past year.
The gaming industry experienced a significant slowdown that caused Roblox and many of its competitors to fare poorly in the stock market. Growing concerns are also emerging about excessive hype surrounding the metaverse. As such, Roblox is economically tied to two deepy uncertain industries.
Another potentially negative factor for Roblox is a steady trend of insider sales.
Over the last year, insiders have sold approximately $52 million in shares. Sellers include the company’s CEO, CFO and CTO, as well as a group of other key insiders. Although the company still has a high degree of insider ownership at about 28 percent, this trend suggests that key executives within Roblox are losing faith in the company’s future prospects.
A final serious problem for Roblox is its cash burn. Between the end of Q4 2021 and, Q3 2022, Roblox’s stockpile of cash and cash equivalents dropped from $307 million to $186 million.
Given the fact that losses are expected to accelerate this year, the company could see its cash reserves continue to diminish. Roblox currently has ample cash to continue its operations, but the rapid dropoff and limited chances for a reversal are concerning.
Is Roblox Stock a Buy?
Despite its challenges, Roblox is a company that could have enormous potential for growth. Through its platform, the company has unlocked the creative talents of developers worldwide and created opportunities for virtual reality apps, immersive gaming and other next-generation 3D experiences.
The problems that plague the business itself, however, are too large to ignore. While Roblox may be a force to be reckoned with in gaming and VR, the company’s losses, debts and dwindling cash reserves are all warning signs investors cannot afford to overlook.
Ultimately, Roblox appears to be a stock investors would be wise to watch but not to buy immediately. Despite promising long-term growth prospects, the company’s excessive valuation, high debt load, lack of insider confidence and reliance on the uncertain metaverse market all make it a high-risk proposition.
Investors who are bullish on Roblox would likely be wise to hold off and wait for concrete indications of a recovery. Unless Roblox begins to pare its losses and improve earnings, the stock simply appears too expensive and too risky.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.