You Might Want to Think Twice Before Giving Up on Roblox

Roblox (RBLX) stock is down nearly 63% year-to-date and 74% since its November 2021 52-week high of $141.60. The correction has knocked $62.6 billion off its market cap in less than 12 months. 

There is no question all kinds of questions are being asked about the online game platform and social media company’s business model by both Wall Street and Main Street. 

If you’ve given up on RBLX stock -- either you owned it and sold it, or you were considering buying at one time -- here’s why you might want to think twice about giving up on Roblox.

What’s Roblox’s Biggest Weakness?

MarketWatch contributor Wallace Witkowski’s Sep. 16 article about the company suggests it’s got a laundry list of issues. According to Witkowski, Wedbush Securities analyst Nick McKay believes some of its strategies won’t be enough to keep the growth engine stoked.  

“In particular, we are skeptical that Roblox’s game engine is sufficiently robust to enable it to retain older and wealthier users,” Witkowski reported McKay said. “In our opinion, the Roblox platform’s graphics seem comparable to those seen on consoles a decade or more ago in certain situations, and several of the initiatives it presented at its analyst day appeared to be already-proven concepts from other platforms.”

I don’t see this as a new argument. Many others have voiced this opinion in the past. Despite the company laying out an ambitious plan at its Investor Day presentation in mid-September, analysts like McKay can only focus on the platform’s weaknesses, the biggest being that it needs a significant graphics upgrade if it wants to be taken more seriously by older gamers. 

There’s no doubt Roblox needs to up its graphics game if it wants to attract anyone older than 15. 

The other issue facing the company is that it had nearly 60 million daily active users (DAUs) according to its August 2022 metrics. Yet it can’t make money on a GAAP basis. 

In Q2 2022, it had an operating loss of $170.3 million, 19.2% higher than a year earlier, on $591.2 million in revenue and $639.9 million in bookings. Worse, its average bookings per DAU (ABPDAU) fell 21% year-over-year to $639.9 million. 

Ideally, it wants its DAU and APBDAU figures to increase monthly. However, like life itself, things happen that get in the way of an ideal scenario.

Whether you’re pro or con about some of the monetization strategies the company discussed at its September Investor Day presentation, it’s fully aware that it needs to generate higher APBDAU.

Here’s Why Roblox Remains a Viable Investment

One of the academics I follow is Howard Yu, the LEGO Chair, Professor of Management and Innovation, and Director of Center for Future Readiness at the International Institute for Management Development in Switzerland. 

I receive Yu’s free newsletter. It’s excellent. 

In his latest Sep. 20 installment, Yu discusses why Roblox is beating Facebook in the race for the metaverse. He believes the company’s so-called low-end technology critics point to as the weak link that makes it a superior platform for future growth. 

It is classic low-end disruption. 

That’s how Facebook launched its first social network targeting university students at Harvard and MIT. That’s how Apple launched the first smart phone, which suffered call drops far more than Nokia. That’s how Sony launched its first transistor radio targeting teenagers who wanted to listen to rock music but didn’t care about the sound quality,” Yu writes. 

“You don’t start from the top, you disrupt from the bottom. Roblox has found popularity by catering to a demographic that tech giants ignore: teenagers.”

Yu finishes his article by reminding readers that Facebook had approximately 300,000 monthly users as of February 2022, compared to more than 203 million monthly active users for Roblox.  

What happens when these teenagers become 20-year-olds?

The Next Generation of Roblox Users

Apple (AAPL) is the classic example of what happens when you get your customers at a young age--they become customers for a lifetime. Or at least, that’s the plan. They call it “Customer Lifetime Value,” and Roblox barks up that tree. 

In August, Roblox said it increased the number of 17-to-24-year-olds by 40%. Many young adults were likely tweens or younger when they first used the Roblox platform. 

“This group is ‘projected to become Roblox’s largest cohort in the near future,’ MarketWatch’s Witkowski reported Stifel analyst Drew Crum said. ‘We see this as important because older kids/adults tend to monetize better vs. younger kids.’”

Of the company's monetization strategies, I find its plan to use immersive ads the easiest one to execute quickly and without too much pushback from users. After all, we live in an era where everything that’s got a flat surface--and even those that don't--have become potential ad space. 

I can remember when branded t-shirts were described as “walking billboards” because they constantly not-so-subtly reminded consumers of a company’s existence. 

Jefferies analyst Andrew Uerkwitz appears to agree.

“‘The immersive portal ads, in our view, could open up new creative ways for experiences to monetize and engage with users,’ Witkowski reported Uerkwitz said. ‘If done right, it’s possible for the advertising business to be as big as in-experience spending.’” 

The analyst feels it will take Roblox a while to roll them out. I’m afraid I have to disagree with this assessment. The company uses product placement as they do for TV shows, only utilizing 3D effects and other tools made possible through augmented and virtual reality. I believe they’ll be a hit.

The Bottom Line

I’ve learned from the latest bear market that there’s a reason for investing in profitable companies rather than money-losers: While you’re never guaranteed success, the odds of losing your shirt go down by the quality of companies you own. 

So, while I continue to like the business Roblox is building, you shouldn’t buy its stock if you can’t stand volatility. This year has been brutally so.

However, a small bet shouldn’t be out of the question if you're an aggressive investor because the risk/reward proposition is significant.

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