Roblox Corporation (NYSE: RBLX) is an America-based video game developing company that serves customers across the United States, the United Kingdom, Canada, Europe, China, the Asia-Pacific, and internationally. The stock rose to fame during the pandemic and is still considered hot because of its play on the emerging metaverse.
However, since the end of last year due to reasons like inflation, rising interest rates, and others, the stock has been experiencing a steep fall in its valuation and has lost more than half of its market cap since its IPO. Roblox stock is down 50% in 2022 and 62% below all-time highs.
Roblox bets on the metaverse
Metaverse is touted as the future and many gaming, as well as big tech companies, are trying to bloom on this platform. The global metaverse market was valued at $107 billion in 2020 and might surpass $750 billion by 2026, indicating a compound annual growth rate of 37.1%.
Roblox enjoys a first-mover advantage in the multi-billion metaverse industry, allowing it to gradually capture a greater market share. Its two-sided network enables effective communication amongst users, content creators and brands thereby letting the company efficiently operate one of the world's most successful metaverses. Notably, Roblox has ended the last quarter of 2021 with a whopping 49.5 million average daily active users.
Moreover, the company’s long-term growth is highly dependent on the expansion of its metaverse ecosystem. For that, it has entered into multiple partnerships over time with big brands like Kering's Gucci to launch Gucci Garden theme rooms. Roblox has also partnered with Nike (NYSE: NKE) to set up a virtual showroom called Nikeland and with the NFL to create a metaverse experience for football fans.
Besides, Roblox is expanding internationally as well and already has its footprints across 180 countries.
Decrease in user engagement
Previously, Roblox’s revenue was nowhere close to what it has been generating these days post the pandemic. The company’s revenue generation literally exploded in 2020 and 2021 and it ended up reporting revenues of $569 million, $509 million, $454 million, and $387 million in the past four quarters of 2021. Such an increase in the revenues might be due to the surge in the company’s Average Bookings per DAU which came at $15.57, $13.49, $15.41, and $15.48 in the last four quarters of 2021.
However, the rate of engagement in the company’s platform is decreasing to some extent as the economy is reopening and children are returning back to their schools. As Roblox is too dependent on children under the age of 13 the economic reopening is casting a negative effect on the platform.
Total engagement hours have reduced from 11.2 billion hours in the third quarter of 2021 to 10.8 billion hours in the fourth quarter of 2021. Fueled by the decrease in engagement across lucrative regions such as the US and Canada there has been a reduction in the growth rate of overall bookings of the company by 8% quarter over quarter.
Roblox is a growing business that is now kind of normalizing the unsustainable growth rate it had attracted previously during the outbreak of the pandemic. The company’s hold over the metaverse is terrific. But as the metaverse concept is gaining steady popularity Roblox will also have to face steep competition with some of the biggest industry giants like Meta (NASDAQ: FB) thereby making its stock quite susceptible to risks.
The stock closed on March 23 at $50.7. The average investor target on the stock is $71.23 which is a potential upside of over 40%. It looks like a tempting buy.