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Roblox ( RBLX -0.48% ) has been getting a lot of recognition lately due to the rising popularity of the metaverse. For the uninitiated, a metaverse is a place where individuals can interact with each other and the environment virtually.
Roblox is one of the industry pioneers that is gaining widespread interest following Mark Zuckerberg’s announcement that Facebook, now Meta Platforms, will evolve into a metaverse company in the next few years. Let’s look at Roblox’s business characteristics more closely.
Image source: Getty Images.
Interestingly, the Roblox platform is free to join and use. It is popular mainly with the younger generation, and nearly 50% of its users are under 13 years old. The company makes money by selling access to premium features and experiences that cost Robux, an in-game currency that can be purchased with real money. Note, too, that Roblox does not create these premium experiences. It outsources the development to third parties and pays them a percentage of their creations’ revenue.
That business model helps Roblox reduce capital expenditures, increasing free cash flows. While the company is not profitable on the bottom line, it generated $558 million in free cash flow in 2021.
As of January, Roblox boasted 54.7 million daily active users. That was up by 32% from the same time in 2021. The company gained a surge of new users and engagement at the start of the pandemic when millions of kids were sent home for remote learning, and extracurricular activities were shut down. With limited entertainment options outside of their home, kids turned to Roblox to pass time.
Revenue exploded in 2020 and 2021. Consider that in 2019, Roblox did not produce one quarter in which revenue surpassed $150 million. In 2021, Roblox generated $387 million, $454 million, $509 million, and $569 million, respectively, in Q1, Q2, Q3, and Q4. Such has been the rapid rise in the popularity of Roblox.
The reverse is also true. Now that economies are reopening and kids are returning to school, Roblox is experiencing a slowdown in engagement. The decrease has caused investor concern, and the stock has fallen 57% in the last three months. There is no telling how steep the falloff in engagement will be or how long it will last. However, according to management, some vital metrics will improve for the company beginning in mid-2022.
Despite the crash in the stock price, Roblox stock is not cheap. As of this writing, it is trading at a price to sales and price to free cash flow of 12.02 and 41.34, respectively. However, those are the lowest prices at which investors have been able to buy Roblox in its brief history as a public company.
Investors interested in buying Roblox can wait to observe how user engagement evolves as economies reopen before starting a position. The stock has earned a premium valuation because of its rapid growth and its business model that delivers healthy free cash flow. That said, both revenue growth and free cash flow are slowing as economies reopen, raising risks substantially.
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