Should You Buy Roblox Stock Now?

Roblox (NYSE: RBLX) is the pioneer of the metaverse, an area where individuals can interact virtually with each other and with the environment. So far, the company has built its success primarily with children aged 9 to 12. This does not mean that the company is relegated to serving this market exclusively.

The coronavirus pandemic has accelerated the growth of Robolox, with children being forced to spend much more time at home. As a result, children were looking for ways to have fun and interact with their friends. The company has proven its usefulness with its popularity and rapid growth in user base and engagement, but does that make Roblox stock a buy?

Image source: Getty Images.

Roblox makes free-to-join a lucrative business

Interestingly, the Roblox app is free. Players can register and take advantage of the multitude of free activities available on the platform. Roblox has 48.2 million daily active users, up 32% from August last year and 5% from the previous month. The company is impressively hanging on to the wave of gamers who signed up at the start of the pandemic. Investors feared that as economies reopened and children returned to classrooms, Roblox would lose some users. This has not been the case so far.

If registration is free, how does Roblox make money? The company sells a game currency called Robux. While many activities on the platform are free, some require players to spend Robux to access them. In its most recent quarter ended June 30, the company reported revenue of $ 454 million, up 127% from the same quarter last year.

More importantly, the company generates these revenues in an accretive manner. Cash flow from operations increased to $ 196 million in the last quarter. The generation of robust cash flow is built into the business model of the company. Users deposit money to buy Robux, which they use to purchase items and experiences over time. Roblox pays the developers of these products only when players use them. External developers take the risk of saving time and resources to create user experiences and only make money if Roblox players like these products.

Facebook competition

Roblox has had the Metaverse category primarily for itself so far. However, that is all about to change as Facebook (NASDAQ: FB) has announced its intention to join the category. Considering Facebook’s massive size and the resources it can bring to the industry, it has the potential to cause headwinds at Roblox.

That being said, Facebook might struggle to gain traction, given its poor reputation for controlling user-generated content on its platforms.

Is Roblox stock a purchase?

Roblox is trading at a price to free cash flow ratio of 65.69, down from 96 earlier in the year. This drop is due to investor nervousness about how the business will move through economic reopenings and the long-term threat of Facebook entering the metaverse.

RBLX price chart to free cash flow

RBLX price to free cash flow data by YCharts

Roblox has proven that consumers enjoy spending time in the metaverse, and that it can deliver that experience in a way that generates significant cash flow. The risks are obvious, but there is also the potential for great returns to make those risks worth it. And investors can reduce the competitive threats of owning Roblox to some extent by owning Facebook shares as well. With or without Facebook, investors can consider buying Roblox shares at these prices.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

About Myra R.

Check Also

We think DLF (NSE:DLF) can stay on top of its debt

Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest …

Leave a Reply

Your email address will not be published.