Insights

4 Red Flags for Roblox’s Future

A popular pandemic stock, Roblox (NYSE: RBLX), is experiencing a reversal of its fate as economies reopen. The metaverse pioneer thrived as kids were sent home from school for remote learning. As schools brought children back into classrooms, Roblox’s key metrics declined. 

Those trends, including falling daily active users, engagement, bookings, and average bookings per daily active user, have investors concerned, and Roblox’s stock is down 78% off its high. Let’s look closer at each of the four red flags for Roblox’s future.

1. Falling base of daily active users 

In its most recent update on June 15, Roblox informed investors it had 50.4 million daily active users. While that was a 17% increase from the same month in the previous year, it was down from the 53.1 million daily active users it boasted a month earlier.

Note that Roblox is free to join and use. It makes money by selling an in-game currency called Robux, which will be discussed more in the sections below.  

The fall in daily active users suggests economic reopening creates entertainment opportunities preferred over engaging with the Roblox app. 

2. Disengagement on Roblox

In its June update, Roblox also noted that engagement fell by 200 million hours from the previous month. The total engagement was 3.6 billion hours in May, down from 3.8 billion in April.

Another disturbing trend is that part of the benefits of the Roblox platform is the network effect. Kids like playing on Roblox because their friends are playing. If players log on less often and stay on for fewer hours when they log in, that could create a downward spiral working against Roblox.

3. Overall booking trends declining 

As mentioned, Roblox is free to join and use, but the company offers some premium services for users to buy with Robux. When players purchase Robux, it is recorded as bookings, which become revenue as players spend that currency on the platform. Therefore, bookings figures could be an indicator of future revenue trends. Therein lies another red flag for Roblox; bookings for May 2022 were $197.5 million at the midpoint, down 10% year over year.  

RBLX Revenue (Quarterly YoY Growth) data by YCharts

It was also down from the $222.5 million bookings it recorded in April. That means Roblox is losing interest among what is arguably its most lucrative players: those who deposit money on the platform. 

4. Average booking trends are even worse 

Indeed, if you account for the changes in user totals and consider the average bookings per daily active user, it highlights a significant drop-off. In May, average bookings per daily active user were $3.92 at the midpoint, down by 23.5% from the same month the year before. It was, again, also down from the previous month’s total of $4.19 at the midpoint.  

RBLX Price to Free Cash Flow data by YCharts

Overall, these are meaningful red flags for Roblox’s future. That said, these is no reason for investors to panic. Roblox’s stock is already down 78% off its highs, arguably already pricing in these risks. With a price-to-free cash flow ratio of 29, Roblox’s stock is as cheap as it has ever been.

On the contrary, the difference between the stock price’s decrease and the percentage drop in the key metrics (none of them were down more than 30%, while the stock is down 78%) suggests that investors may be overreacting to the bad news. 

Parkev Tatevosian has positions in Roblox Corporation. The Motley Fool has positions in and recommends Roblox Corporation. The Motley Fool has a disclosure policy.

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