Roblox (RBLX 2.85%) stock has been on a roller-coaster ride since the company went public in 2021. In its first year as a public company, shares climbed over 90% from their IPO price to reach a high of $134.72 before plummeting to a low of $23.19 just a few months later.
The bulls celebrate the company's potential as it rides the metaverse trend, while the bears worry that the metaverse is just hype that will fade over time.
Let's consider the arguments from both sides before concluding whether Roblox stock is a good investment.
Why the bulls are excited about Roblox
The metaverse is a trend that has gained significant attention in recent years. This virtual, interconnected universe where people can interact with each other and digital environments in real time, without the limitation of physical boundaries, has the potential to open up transformative opportunities across various industries.
While still in its early days, the Roblox platform offers a good glimpse of what a metaverse could look like. Everyone on the platform has an avatar (a virtual identity), allowing them to interact with other users through different experiences like the games developers build on Roblox. And by using Robux, the metaverse currency, users can buy virtual items or pay for other in-game enhancements, giving rise to a vibrant virtual economy.
In many ways, Roblox is already running its own mini-metaverse. Moreover, there is strong evidence Roblox can grow this virtual community further in the coming years. For example, daily active users (DAUs) have almost doubled from 33.4 million in the second quarter of 2020 to 65.5 million in the second quarter of 2023. Quarterly hours engaged rose from 8.6 billion to 14.0 billion in the same period. More importantly, these metrics have risen beyond the levels achieved during the pandemic lockdowns, confirming the sustainability of their growth trends.
Moreover, users are not only spending time but also cash on Roblox's platform. Revenue growth has moderated in recent periods with the second quarter's top line rising 15% year over year to $680.8 million. However, that figure has more than tripled from the $200.4 million reported in the second quarter of 2020, and it also exceeded the peak of the pandemic period, again confirming the platform's growth prospects.
In other words, Roblox provides a good example of what a metaverse can be. What's more, the platform, via its active community of users and developers, could also shape the future of the industry.
NYSE: RBLX
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Why the bears are pessimistic about Roblox
While the bulls cheer the immense possibility of the metaverse, the bears are not that convinced.
The metaverse remains a niche industry that will take years (if not decades) to truly become mainstream. And for that to happen, the industry has massive hurdles to overcome, including technology issues, regulatory challenges, privacy and security concerns, and more.
Besides, while Roblox provides an early view of what a metaverse could look like, it may still end up like other early movers such as Friendster and Yahoo!, which eventually passed on the baton to more successful competitors. In other words, Roblox's early-mover advantage does not guarantee long-term success.
On top of that, the bears complain that Roblox remains an unprofitable business despite all the years of growth. Its net loss almost doubled in 2022 to $924 million as it accelerated its investment in workers and infrastructure. And if a company with $2.2 billion in annual revenue can't generate a profit, when will it be profitable?
In short, the bears think there are just too many uncertainties that Roblox has to overcome to be successful in the long run, making it a risky investment.
So, is Roblox stock a buy?
Roblox is at the forefront of an up-and-coming industry, but because the industry is still at its inception, there's no telling how it will unfold over the years and how significant a role Roblox will play down the road. Heavy losses add another layer of uncertainty that shareholders must endure.
With shares commanding a premium valuation at 7 times trailing-12-month sales, only the most patient and risk-tolerant investors should buy the stock. And even then, they should hold just a small position in their portfolios.
