It seems everyone in the world of tech is talking about the metaverse. But what exactly is the metaverse? While the possibilities for what it might become are seemingly limitless, the current notion is that it will be a 3-dimentional world in which users interact with each other and the environment, often via avatars. It can be used for many applications including business, social, or gaming — and Roblox (NYSE:RBLX) is all about gaming. The company provides a platform where users can create or play games for free. Roblox then makes most of its revenue by selling in-game “Robux,” which can be used to make purchases that enhance the user’s experience.
Investors are looking for the best stocks to get exposure to this growing industry. Many companies have a small amount of exposure, or might dabble a bit, but Roblox is a pure metaverse growth stock. Does this make it a buy?
The bullish case
Roblox’s revenue has exploded with a nice assist from the pandemic; however, there are signs that this is just the beginning. In Q3 2019, the company made just $131.1 million. Two years later, revenue for Q3 2021 came in at $509.3 million. This amounts to a compound annual growth rate (CAGR) of 97%.
Roblox is also producing positive cash flow from operating activities (CFO), with over $181 million produced in Q3 2021 alone. Over the last four quarters, the company has produced $715.9 million in CFO — not too shabby. Daily active users (DAU) continue to increase as well, with Q3 2021 showing 31% year-over-year growth to 47.3 million DAU. More than half of all users are now over the age of 13, as opposed to before the pandemic, when most users were under 13. This is encouraging, as adults will generally have more spending power. Engagement hours are also steadily climbing. This was true before the omicron variant and shows that Roblox will have staying power after the pandemic. The metaverse is the future of gaming, and Roblox has a tremendous platform. Roblox stock is set to be a long-term winner despite short-term macroeconomic headwinds.
The bearish case
Undoubtedly, Roblox has executed a terrific strategy to grow revenues during the pandemic. The user base increases are also impressive. However, the company has not proven that it has a profitable long-term model, and there are several concerning signs.
First, revenue growth is already slowing. In Q1 2021, Roblox posted 140% year-over-year revenue growth. In the following quarters, this has declined steadily to 127% in Q2 2021 and then 102% in Q3. This trend will likely continue in Q4 and beyond. Next, the company’s net loss is increasing. In Q3 2020, the company lost $48.6 million. This loss mushroomed to $74 million in Q3 2021. If the company struggles to make a profit during a pandemic, when users have fewer other entertainment options, this does not bode well for the future.
Adjusted EBITDA is also falling steadily since Q4 2021, a recent pandemic peak. In that quarter, Roblox reported over $225 million in adjusted EBITDA. That number is down to just $135.7 million in Q3 2021.
The macroeconomic trend is also hurting Roblox stock, and this could continue. The Federal Reserve has turned hawkish amid rising inflation. With inflation near 7% in the U.S., interest rates will soon be on the rise. This has led to increased yields and steep drops for many growth stocks. This headwind could be short-lived; however, Roblox could have much further to fall. The company currently trades at a forward price-to-sales (P/S) ratio of 18. The slowing growth, the downtrend in adjusted EBITDA, and macro conditions make this stock likely to underperform the market for the foreseeable future.
Both the bulls and the bears make a compelling case. One cannot argue with the stellar growth, increasing user base, or impressive gains in cash from operations. However, the company struggles with profitability and may not be able to live up to its current valuation, especially with the difficult macroeconomic environment. Roblox also must prove that it has staying power beyond the pandemic. There are likely better entry points ahead for long-term investors who would look to accumulate shares of Roblox stock.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.