Stocks to buy
  • Roblox (RBLX) trades at a premium compared to other gaming companies.
  • Gaming engagement remains strong across the company’s platform.
  • Seasonal weakness is a risk, but the long-term growth story justifies buying RBLX stock.
Source: Miguel Lagoa / Shutterstock.com

Roblox (NYSE:RBLX) is the Snap (NYSE:SNAP) of video gaming, as its platform appeals to younger users. However, stock markets don’t agree on its prospects. After trading steadily at $80 for much of last year, RBLX stock rocketed higher only to collapse.

Shareholders could blame the Nasdaq’s steep decline for pulling Roblox stock lower. But that is only part of the story. Admittedly, the company’s valuations required a correction.

At these levels, markets need to examine the gaming platform’s relative growth against its peers. For example, Electronic Arts (NASDAQ:EA) and Take-Two Interactive (NASDAQ:TTWO) trade at a fraction of Roblox’s price-to-sales ratio. RBLX stock trades at a premium for a good reason.

Roblox Has Strong Gaming Engagement

For April, Roblox reported that hours engaged grew by 18% year-over-year (YOY) to 3.8 billion. Despite bookings falling between 8% and 10% YOY to a range of $221 million to $224 million, it enjoyed strong platform usage. For example, daily active users rose by 23% YOY to 53.1 million. Revenue still outpaced the industry, growing by 30% to 32% to between $189 million to $192 million.

Shareholders should anticipate Roblox will realize profits from its revenue growth. In the short term, the company must invest in its platform. This will differentiate its offering and keep its users coming back.

Roblox is enhancing the experience of its physically-based rendering paradigms. For example, it introduced more subtle features, such as different types of building materials. This gives more power to game developers, who may customize and improve the user experience.

The company will also launch facial animation in Roblox Studio. CEO David Baszucki said that it would not share the date of its long-term launch yet, but investors should expect a positive impact from this development. It will benefit the platform in the long term despite not lifting key performance indicators.

Post-Covid Risks for RBLX Stock

Roblox is not immune to the rapid deterioration of businesses that benefited from the stay-at-home trend that resulted from the pandemic. With restrictions lifted, companies like Peloton (NASDAQ:PTON) and Roku (NASDAQ:ROKU) did not expect a sudden customer slowdown.

People will embrace the freedom of going outdoors and watching movies in theatres and naturally spend less time online. This includes spending less money on Roblox’s metaverse platform.

Fortunately, the company has fans that will spend disproportionately more than the average user. As freemium users leave the platform, Roblox will increase the gameplay appeal to retain paying customers.

Markets will tire from selling off RBLX stock. They corrected the stock’s froth in recent months. Looking ahead, investors should brace for a slowdown in gaming. Seasonally, people will spend more time outdoors in the summer months.

As travel slows in a few months, user activity on Roblox will accelerate again. Before that happens, patient investors should buy a small position.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.

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