After hitting all-time lows, you may wonder whether Roblox Stock remains a worthy buy for long term investment or not. Considering Roblox Corporation failed to get a mark on the list of the 30 Most Popular Stocks Among Hedge Funds, many Roblox investors have had a bumpy ride lately.
In fact, the Roblox’s stock surged to a high of $140 in the subsequent months, after at $70 on its first day of trading. After that, the stock price has since dropped by over 55%. So, if you are wondering whether or not Roblox’s Stock is worthy for long term investment, let’s find out more information about the growth of Roblox Stock through our post below!
Is Roblox a Worthy Long Term Investment?
Roblox is currently well-positioned to ride the metaverse trend. It is known that Roblox stock is one of the top metaverse stocks to watch in the current stock market rally. However, Roblox boasts huge sales growth in recent quarters amid the company’s potential in emerging metaverse investing themes.
According to some sources, the Roblox shares are now pulling back sharply during the stock market rally. Its stock is not a buy right now, amid the current stock market volatility and Roblox’s precipitous drop.
Talking about whether Roblox stock is a good long-term investment, you may need to think that the issue with a company like Roblox is whether its overnight success is just a one-time or does it stem from that elusive golden catalyst or transient stroke of luck.
To know whether Roblox stock is a worthy long-term investment, you can just get the answer after the next couple of quarterly results that come out. For now, it may be wise to sit this one out and wait and see what happens, considering that Roblox trades at a near 30% premium from its IPO price. So, you need to wait for the stock to form a new base that will offer a new buy point.
Why Should You Consider Buying Roblox Stock?
Even though some people who had invested in Roblox looked at the positive sides, you may need to consider deeply when you have a plan to buy Roblox Stock.
It is such a normal condition if the investors would expect Roblox to trade at a high valuation because of its good prospects. According to its latest share price of $58.60, Roblox trades at a price-to-sales (P/S) ratio of 17 times. Certainly, this valuation is still steep, particularly compared to other prominent companies such as Meta Platforms (FB 4.02%) that trades at a P/S ratio of less than eight.
For more information, another gaming platform trades at more than 25 times sales (a high valuation does pose significant risks), though it is not uncommon for high-growth stocks to trade at a high valuation like Unity Software (U 9.83%). In this case, the most clear and obvious is the upcoming increases in interest rates.
Particularly on high-growth stocks, a higher interest rate is a drag on stock price. On other hand, it actually makes it more expensive for growth companies to increase capital for future expansion. Aside from that, the majority of its intrinsic value will come from future cash flow many years ahead, since Roblox is still taking losses.
Furthermore, a higher interest rate leads future cash flows less valuable in present value terms. In addition, a high valuation also means that the investors have high expectations from Roblox. However, its valuation may need to come back down to earth in the short term, if Roblox fails to meet with those expectations such as maintaining its high growth rates.
Additionally, the metaverse has become a new battleground increasingly for start-ups and established companies. In particular, Meta Platform’s official entry into the metaverse industry means that Roblox can no longer keep the whole pie to itself. With 2 billion users and numerous resources, Meta will be a threat to Roblox’s global ambition.
Luckily, the metaverse industry may be large enough for multiple players to succeed in the long term. Aside from that, Roblox has had a head start of many years. Well, Roblox Stock may still be a viable long-term stock pick, as long as it can continue to innovate and maintain its first-mover advantage.
How Is Roblox’s Business Model?
Even though investing in Roblox Stock cannot say ‘It’s tempting’, but there are a number of reasons for investors that may find Roblox a compelling investment chance. At the beginning, Roblox has demonstrated a great execution track record, proof of its strong financials. Thanks to the growth in Roblox’s user base, the revenue surged almost threefold from $313 million in 2018 to $924 million in 2020.
Although it’s important, those financials only inform us part of the story. That means the numbers also demonstrate the resilience of Roblox’s business model that the Roblox company has fine-tuned over the last 17 years.
It is known that there are two parts of Roblox’s business model. On other hand, Roblox helps facilitate the relationship between gamers and developers. In this case, the developers focus on making the best games, while the gamers reward them by spending money on virtual items.
Generally, those developers reinvest part of their earnings to increase their games that help retain existing users and attract new ones. For the result, it is a mutually beneficial relationship with ever-growing content and an expanding user base.
However, that is just one part of the equation. The other part actually revolves around the social element of Roblox’s platform. When the users join Roblox, they invite their friends to join them naturally. The new users in turn will invite their other friends to join Roblox.
In other words, the virtual cycle of ever-growing content and user base is reinforced as the platform’s social aspect. Well, the technology company is really working hard to broaden its use base.
When Roblox’s use case expands, its user base will diversify from the early gaming-centric community. Sure, a diversified user base actually helps the company in its monetization effort. In the future, the gaming companies including Roblox, aim to expand their income streams by launching new services such as subscription, advertising, e-commerce and many others.
On my daily job, I am a software engineer, programmer & computer technician. My passion is assembling PC hardware, studying Operating System and all things related to computers technology. I also love to make short films for YouTube as a producer. More at about me…