Is Roblox Stock A Good Investment?

Roblox (RBLX) is an online gaming platform enabling users to play and create games in a variety of genres using the company’s own proprietary programming engine, the Roblox studio.

The company generates most of its revenue through micro-payments using its native Robux currency, which users purchase with real money and then use to gain other in-game accouterments such as game passes, avatars, weapon skins and VIP servers.

Is Roblox Stock A Buy?

At first glance Roblox appears to be an expensively priced company – perhaps even grossly overvalued if you’re being especially pessimistic. Its forward P/E ratio is an eye-watering 112.07, and its forward Price/Sales multiple currently stands at 20.67 – a high number when you consider that the sector median is just 1.86.

But Roblox’s story is a more nuanced one than most others, and you have to take into account the firm’s history when attempting a valuation of its business. For example, the company isn’t young – it’s been around now for going on 15 years – and many investors might baulk at the idea that the firm is still in its growth phase; and yet, for all intents and purposes, it is. 

Because it wasn’t until the COVID-induced lock-downs of 2020 – when younger children had limited ways of communicating with their friends outside of their own households – that Roblox really took-off. The potential of the platform to become a hybrid gaming/social network only then became apparent, a potential reflected in the company’s surging user base and engagement hours. 

Indeed, this fusion of a gaming platform with a tool for socializing is what gives Roblox its business moat. Yes, other applications are the best at their own thing – YouTube for video streaming, Steam for games distribution – but no-one is creating the immersive ecosystem that Roblox is building.

Roblox Valuation: Short-term vs Long-term Growth 

Roblox’s first quarterly results as a publicly listed company were surprisingly good; so good in fact that RBLX share price jumped 20% – from $64 to $77 – the day that the results were announced. The company missed on its EPS expectations, but this was about the only negative thing to come out of it.

Other positive financial metrics of note were the company’s total revenues of $387.0 million, up 140% year-on-year; its bookings, up 161% at $652.3 million; and its second-best free cash flow ever of $142.1 million.

More significant than the raw financial figures, however, were Roblox’s key operating metrics. Two of the most important are its Daily Active Users (DAUs) and Hours Engaged. And on both these barometers of operational health Roblox posted record numbers: 42.1 million DAUs, and 9,674 million Hours Engaged.

But so much for past performance. The question now is where is Roblox heading? The problem here seems to be user retention; and because the platform’s typical user still appears to be under 16 years of age, it isn’t clear just yet whether these players are going to stick around.

Also problematic is the fact that Roblox is heavily reliant on app stores for the downloading of its platform – a model which is highly vulnerable to competition pressure and the future policies of the app stores themselves.

Roblox Stock: The Bear Case

The bearish argument against Roblox originates from the fact that if the coronavirus pandemic was a tailwind for the business, then the retreat of the crisis would, logically, be a headwind. And there’s little doubt that the stay-at-home orders issued during the COVID lock-downs definitely contributed to the company’s heady rise over the last fifteen months.

But there are other, more tangible risks on the horizon. The first is that Roblox is being sued by the National Music Publishers’ Association. The NMPA alleges that Roblox illegally used its members music on the gaming platform, and in the process made “hundreds of millions of dollars” off of such use.

Roblox has vowed to defend itself – but history proves that even Google’s YouTube couldn’t fudge this issue, and the outcome, however it falls, is likely to be costly for the company.

Second, Roblox faces some tough questions over its platform safety features, given that the average user is still only a minor. Again, this is an issue that YouTube had to grapple with; and, unfortunately for Roblox, it’s one that’s ripe with potential pitfalls and regulatory risk that could cause a lot of headache if not handled correctly.

Finally, there’s the competition. Indeed, Roblox readily acknowledges it must compete with many big name brands in the entertainment sector if it wants to win the battle for user engagement hours.

It lists its rivals as Amazon (AMZN), Google (GOOG), Facebook (FB), Disney (DIS), Tencent, Unity, Netflix (NFLX), and Instagram…to mention but a few. Just taking one of these businesses on would be difficult. It remains to be seen how Roblox will fare against them all, however.

Is Roblox Stock a Good Investment? The Bottom Line

The issue with a company like Roblox is whether its “overnight” success is just a one-time, transient stroke of luck; or, does it stem from that elusive golden catalyst that the business has been waiting for all these years?

Following on from that, can its success be replicated going forward?

The answer to this will probably only be answered after the next couple of quarterly results come out. But for now, given that Roblox trades at a near 30% premium from its IPO price, it might be wise to sit this one out and wait and see what happens.

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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.