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3 Things About Roblox That Smart Investors Know

3 Things About Roblox That Smart Investors Know

Roblox ( RBLX 7.05% ) was one of the hottest new growth stocks of 2021. The gaming platform company went public via a direct listing last March with a reference price of $45 per share. Its stock started trading at $64.50, then eventually hit an all-time high of $134.72 last November.

Roblox initially attracted a lot of attention because it was wildly popular with tween creators and players. The pandemic also generated fierce tailwinds as more students stayed home and spent more time on the platform.

A lineup of Roblox avatars. Image source: Roblox.

But today, Roblox stock trades in the low $40s. Concerns about its decelerating growth in a post-lockdown world, its widening losses, rising leverage, and ongoing stock dilution all caused investors to head for the hills. The broader sell-off in growth stocks -- caused by inflation, rising interest rates, and other macro challenges -- exacerbated that pain.

I weighed the pros and cons of buying Roblox in this challenging market last month, and decided that it was still too risky to own. But today, I'll dig deeper and discuss three lesser-known facts about this polarizing company, and how they might impact its long-term growth.

1. It's focused on gaining older users

The bears often claim Roblox is too dependent on children under the age of 13, who accounted for more than half its audience when it went public. To ensure that its platform is a safe virtual playground for kids, Roblox needs to constantly censor its own content, shield its platform from predators, and carefully handle the personal data of its younger users. Any missteps in those areas could endanger children and tarnish its brand.

Tween users could also eventually leave Roblox's simple gaming platform behind as they grow older. In its S-1 filing, Roblox admits those young users "may be less brand loyal and more likely to follow trends, including viral trends, than other demographics." Moreover, creators who want to develop more-complex games could eventually graduate to professional game engines like Unity Software ( U 4.74% ) or Epic Games' Unreal Engine.

To address those weaknesses, Roblox plans to gradually reduce its dependence on tween users. In the fourth quarter of 2021, 52% of its daily active users (DAUs) were over the age of 13, compared to 46% in the fourth quarter of 2020 and just 40% in the fourth quarter of 2019.

During the latest conference call, chief financial officer Mike Guthrie said Roblox's growth in the U.S. "will be defined primarily by older users" for the next few years. So if Roblox's percentage of older users continues to climb, it might just silence the bears who believe it's just a passing tween fad.

2. An increasing dependence on overseas growth

The other pillar of Roblox's long-term growth is its overseas expansion. The company ended the fourth quarter of 2021 with 49.5 million DAUs, but just 11.2 million of those were in the U.S. and Canada.

Europe accounted for 13.4 million DAUs, the Asia-Pacific (APAC) region hosted 11.2 million DAUs, and the remaining 13.7 million DAUs were located across its Rest of World (ROW) region. All three regions have been gaining DAUs at a much faster rate than its core U.S. and Canada business.

DAU Growth Year Over Year (Decline)

Q1 2021

Q2 2021

Q3 2021

Q4 2021

U.S. & Canada

62%

5%

6%

(1%)

Europe

79%

19%

15%

23%

APAC

77%

57%

75%

101%

ROW

104%

63%

54%

46%

Total

79%

29%

31%

33%

Data source: Roblox.

Last quarter, Roblox highlighted Brazil, Russia, India, and Japan as its fastest-growing overseas markets.

But that growth is also a double-edged sword for two reasons. First, its overseas users generate much lower revenue than its American and Canadian users. Second, geopolitical conflicts, like Russia's invasion of Ukraine, and inflation could significantly affect its overseas growth.

So investors should be wary whenever Roblox aggressively touts its international expansion since it will likely throttle its bookings and squeeze its margins for the foreseeable future.

3. Its long-term growth relies on the metaverse

Lastly, Roblox's long-term growth relies on the expansion of its metaverse ecosystem with brand partnerships. For example, Kering's Gucci brand launched its Gucci Garden theme rooms on Roblox last May, while Nike set up a virtual showroom called Nikeland last November.

In December, Roblox partnered with Virtual Brand Group to launch Forever 21 Shop City, a metaverse storefront for the apparel brand. This February, it partnered with the NFL to create new metaverse experiences for football fans. It's also been working with Sony Music Entertainment to launch metaverse concerts and experiences for its recording artists.

These partnerships, which are turning Roblox into an ever-evolving gaming platform like Epic Games' Fortnite, could lock in its existing users, boost its appeal with older players, and complement its overseas expansion.

Still a lot to prove

Roblox's stock might look reasonably valued at eight times this year's sales, but the company still has a lot to prove. Its long-term ambitions are admirable, but it will need to stabilize its bookings growth and strengthen its balance sheet before I consider it a worthwhile investment.

3 Things About Roblox That Smart Investors Know

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