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Roblox has been surging since its IPO in March 2021 — but is it still a buy?
Let’s find out in this Roblox Stock Forecast & Analysis.
What is Roblox?
According to the company, “Roblox is a global platform where millions of people gather together every day to imagine, create, and share experiences with each other in immersive, user-generated 3D worlds.”
Roblox itself is not a video game; it is a place where people play games made by other developers. Roblox users have published over 20 million games on the platform.
Roblox makes money when users buy and spend Robux (the platform’s native currency) on aesthetic items in Roblox games.
The developers who created the game receive a portion of these transactions — which there are many.
Over half of U.S. kids under age 16 played Roblox in 2020.
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Roblox Stock Investment Potential
#1. Betting on the Creator Economy
Roblox leverages the creator economy better than most social media platforms. It incentives quality “supply” by sharing profits directly with its creators.
This structure has resulted in a strong developer community, which further enriches the user experience on the platform.
The better the game, the more time Roblox users will spend playing it. The more time spent on a specific game, the more the developer earns.
This business model taps into increasingly popular decentralization themes that are popping up in other markets, from hospitality (Airbnb: ABNB) to e-commerce (Shopify: SHOP) to crypto (bitcoin and ethereum).
Built-in incentives for creators (get a cut of subscription fees from Roblox premium)
#2. Young Users
Roblox users are young — only 15% of users are above the age of 25.
These users spend an average of 2.6 hours per day on the platform.
We expect user spending to increase as the user base’s income increases with age.
Some might argue that an aging user base is bearish as users might “outgrow” the platform. We don’t subscribe to this thinking.
We believe an increase in discretionary income will outweigh the downside of the small portion of users that stop playing as their free time decreases.
#3. Advertising Opportunities
These companies are promoting branded content within games, similar to companies and brands that advertise in Fortnite.
Where there are eyeballs, there are advertising dollars, but few companies have Roblox’s user demographic.
Roblox is uniquely positioned to target a demographic that is traditionally difficult to reach. Advertisers are willing to spend large amounts of money to get their products in front of young users to create life-long customers.
#4. Virtual Goods Market
Video game innovation is typically ahead of the curve. Keep an eye on video game developers if you’re interested in the next big breakthrough in tech.
Virtual goods were the industry’s latest success. A small portion of users are willing to spend enormous amounts of money on scarce products and services within a virtual world.
While GPUs from Nvidia (NVDA) are expensive, these virtual goods scale better than their physical counterparts, which results in a higher-margin business model.
Ok, back to Roblox — users spend the platform’s native currency, Robox, to buy clothing accessories, emotes, and other upgrades for their avatars.
This is another strategy the video game industry pioneered — launch a freemium model and then offer in-game purchases.
In 2020, Roblox did $1.9 billion in bookings, equating to an average of $58 per daily active user for the year. This represents a 40% increase year-over-year.
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Roblox Stock Moat
We believe the following differentiates Roblox from its competition:
Decentralized Creative Updates + Skin-in-the-Game Developers
Roblox is less vulnerable to disrupter games because of its decentralized network of developers.
Traditional gaming companies are centralized and therefore more susceptible to blind spots, making them more likely to miss the next big in gaming.
Roblox’s platform fosters free-market competition within its merit-based structure.
There are thousands of creators cooperating and competing to pull forward growth. We believe their asynchronous iterations on what works and what doesn’t will outpace centralized game developers.
These iterations unfold instantaneously in a free market where successful developers are incentivized to stay on the Roblox platform.
Roblox’s new subscription service, Roblox Premium, shares a portion of the subscription fee based on the time users spend with their content.
Like most things that are left to compete freely, the majority of resources and success will aggregate to the few.
This suggests that there will be a higher retention rate for developers of the highest caliber.
Roblox Stock Analysis
Roblox reported Q1 earnings on May 10 — let’s see the highlights:
- Revenue: $387 million, up 140% YoY
- Loss-per-share of $0.46
- Daily-Active-Users (DAUs) rose by 37% YoY to 43.3 million
- Bookings of $652.3 million, up 161% YoY
- Average booking per DAU of $15.48 quarterly, up 46% YoY
- Users spent 9.7 billion hours on the platform, up 98% YoY
Roblox’s key performance indicator is the growth of its average booking per DAU — which showed promising growth in Q1. This fueled RBLX’s 5% rise following the call.
Roblox Stock Competition
Roblox has set the video game industry on fire, and the competition has taken notice. Here are Roblox’s top competitors:
Roblox’s engine is more user-friendly than the Epic Games and Unity Software platforms.
While this results in wider adoption for Roblox, more advanced developers and coders may spend their time with Epic Games or Unity.
Roblox Stock Bear Case
Roblox has a price-to-sales ratio of 42x — the engine is running a bit hot. Investors typically pay a premium to own the “top company” in high-growth sectors, such as CrowdStrike (CRWD) in cybersecurity and Square (SQ) in fintech.
Unity Software’s PS ratio is currently 27x, down from 50x at its December highs for comparison amongst game developers.
The company just IPO’d, and investors will allow it to be unprofitable for quite some time, but not forever.
#2. Robux Accounting FUD
Roblox was forced by the SEC to adjust its financial reporting. This was the second time that Roblox had to delay its $41 billion IPO.
The SEC wanted Roblox to be more specific and recognize its revenue from Robux differently, causing the company to alter its accounting practices.
CEO David Baszucki said that the SEC’s requested changes will actually cause the company’s revenue to increase.
So why is this in the bearish section for Roblox stock?
The SEC might one day have more questions about the sale of virtual goods on the platform.
Fear, uncertainty, and doubt (FUD) headlines that are typically associated with crypto-Ike assets could send RBLX spiraling, regardless of the validity of the concerns.
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Roblox Stock Allocation in Your Portfolio
This section intends to help you decide how much Roblox stock to buy if any.
Your conviction in RBLX will determine your allocation — hopefully, these questions get the ball rolling:
- Will RBLX outperform the S&P 500, QQQ, and bitcoin over the next 10 years?
- Will Roblox’s current user base “outgrow” the platform?
- Will the next generation of gamers and developers use Roblox?
- Can Roblox successfully innovate and identify the next big thing in gaming (because there’s always a next big thing in gaming)?
- Can Roblox defend its market share from Epic Games and Unity Software?
- Will bookings per DAUs fall as the economy reopens following the pandemic?
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Roblox Stock FAQs
Should you buy Roblox stock right now?
Roblox has been soaring since its IPO — RBLX is up 31% since its public offering just a few months ago. Investors buying Roblox stock right now believe the company’s average bookings per DAU will continue to increase.
Is Roblox Stock overvalued?
Some investors believe Roblox is overvalued given its high price-to-sales ratio relative to other companies in the video game industry. The threat of rising interest rates might cause RBLX and other high-growth companies to fall.
Is Roblox Stock a buy, sell, or hold?
Roblox is a buy, sell, or hold depending on your investing goals and time horizons. People buying Roblox stock probably have a higher risk tolerance than the average investor.
Bottom Line: Roblox Stock Forecast
Roblox is a fascinating company that merges the physical and digital worlds. Expect the company to continue to create new technology and business strategies that seep into society at large.
This article is for informational purposes only. It is not intended to be investment advice.