Online game platform and game creation system Roblox (NYSE:RBLX) has performed well since its direct listing last year — its shares began trading at around $60 and subsequently more than doubled over the next few months to hit a high of $141.60. The surge in user base during the pandemic, as well as the ongoing optimism on the metaverse, drove the strong performance in stock price.
Yet, after hitting its all-time-high, Roblox’s stock price has corrected by more than 40%. While we can’t be sure, there are a few possible reasons behind the recent drop.
A solid quarterly result but with weaker growth
The COVID-19 pandemic has been disrupting industries of all kinds, especially airlines and hospitality, for almost two years now. For some companies though, COVID-19 has actually helped accelerate growth. Roblox has benefited tremendously during this period as users have had the time and desire to linger on its platform because temporary lockdowns gave them little else to do. These lockdowns have contributed to the gaming company reporting some strong numbers — in the third quarter of 2021, revenue more than doubled to $509 million while average daily active users (DAUs) rose 31% to 47 million. It also generated a positive free cash flow of $171 million, a rare feat among high-growth companies.
While solid, these numbers were weaker when compared to the previous quarters. For perspective, revenue grew 127% and 140%, respectively, in the prior two quarters. Besides, Roblox reported that total engagement hours in November 2021 — while up 32% year over year — came in weaker than the 4 billion hours clocked in August 2021. The lower numbers are understandable. The pandemic gave Roblox a bump in growth over the last two years. But as global economies have been gradually reopening, users are spending less time (and money) on Roblox’s platform and more time doing other things that are no longer locked down.
Roblox’s moderating growth trend has caused some uneasiness among investors — especially those who have expected the company to sustain its triple-digit percentage growth rates. Still, long-term investors can remain hopeful of Roblox’s prospects going forward. One of those prospects relates to the metaverse trend. Roblox’s platform has been working on metaverse-related areas for more than a decade, meaning it is in a leadership role along with companies like Meta Platforms that have dabbled for years in the metaverse through its ownership of Oculus gaming headsets but only really focused on it publicly in the last year. Roblox is investing heavily — in areas such as developer community, international business, artificial intelligence and others — to maintain its leadership. In short, Roblox’s growth story is really only beginning.
Investors are moving away from growth stocks
The last two years were a great time to own growth stocks, with highflyers like Tesla rising more than tenfold between 2020 and 2021. The rising tide, however, has been lowered toward the second half of last year. Some of the biggest gainers during the pandemic — such as Zoom Video Communications and Fastly — have seen share prices more than halved from their peaks. The downward trend spared no growth stocks, including Roblox.
On one end, investors fear that growing inflationary pressures will inevitably lead to a higher interest rates, which are tough on young companies in need of capital to help them grow. As the bulk of Roblox intrinsic value will come from its future cash flows — it is still losing money — an increased interest rate will reduce the present value of these future cash flows, which scares away some stock traders.
Then there are the investors who, in general, have become more cautious toward owing high growth — but unprofitable — companies. They seem to have become more selective of what stocks to own. There has been a trend of late toward buying stock in companies that have a long and profitable operating history and a solid balance sheet. Microsoft, Alphabet, and Apple are a few examples of those.
What’s next for Roblox
Overall, Roblox’s weaker growth and the change in investor sentiments toward high growth (but loss-making stocks) likely caused its share price to fall. Still, the company’s long-term prospects remain largely intact.
To this end, the tech company is working hard to ride the metaverse trend by expanding aggressively into the older cohort groups and also into international markets. For example, it formed a joint venture with Tencent to grow its reach in China. It is also investing heavily in talents and technology to remain the go-to platform for its users and developers. And while Roblox might not replicate its outsized stock price growth during the pandemic, it can still grow at high rates as long as it can continue to delight its users and developers.
In short, there is probably still a long way ahead for this young company.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.