What happened
Investors lost confidence in Roblox (RBLX 7.32%) in the second month of 2022 after the company reported underwhelming revenue and user growth for the fourth quarter of 2021. According to data from S&P Global Market Intelligence, shares of the gaming platform dropped 21.7% in February.
So what
On Feb. 15, Roblox released its earnings report for Q4 2021. Revenue hit $568 million in the quarter, up 83% year over year, but below analyst expectations of $604 million. Earnings per share was a loss of $0.25, which was worse than the consensus analyst expectation for a loss of $0.11 in the quarter. These two headline numbers are a big reason why Roblox dropped 20% the day following the report, making up the majority of the stock's losses last month.
Image source: Getty Images.
Diving deeper into the report, investors were likely concerned by the slowdown in daily active user (DAU) growth in Roblox's core North American market. DAUs in the U.S. and Canada declined 1% year over year in Q4, and have had four straight quarters of sequential declines. Overall DAUs hit a record high because of the 101% year-over-year growth in the Asia and Pacific region, which counteracted the stagnant DAU number in North America.
Why are DAUs so important? Because the more users interact and spend time on the Roblox platform, the more they will likely spend money on Robux, Roblox's in-game currency that drives all of its revenue and profits. If DAU growth continues to stall out in the U.S. and Canada, Roblox's growth trajectory might not be as high as some expect.
Now what
As of this writing, Roblox stock is down over 50% just this year and trades at a market cap of $28 billion. In 2021, the company generated $1.9 billion in revenue, up 108% year over year, giving the stock a price-to-sales ratio (P/S) of 14.7. This is quite expensive compared to the market average of 2.89.
However, if you believe Roblox can continue growing revenue at a fast pace, that this North American slowdown is only a short-term blip, and that the company will eventually have a strong profit margin, now could be a great time to start a position in Roblox stock. Just know that owning shares doesn't come without risk, and the stock could continue to have loads of volatility in the short term.
