Roblox Corporation (NYSE:RBLX) shares surged 14% on Tuesday. No new corporate announcement can take credit for the renewed interest in the stock. Meanwhile, the S&P 500 finished the day up 2%.
Shares of many technology and software companies were trading higher on Tuesday amid stock volatility as traders assessed the possibility of a recession. Growth companies as a whole were also trading higher amid falling yields. Falling yields increase the present value of future cash flows, increasing growth stock valuations.
Shares of Roblox Corp were trading lower last week after data showed a slowdown in consumer spending in the United States in May. The US Bureau of Economic Analysis reported that real personal disposable income fell 0.1% in May, real personal consumption expenditure fell 0.4, while spending on goods fell 1.6%.
Roblox Corp Stock Rallied After IPO
Roblox operates an online platform to create, publish, and manage three-dimensional (3D) virtual experiences such as video games and other virtual worlds. Demand for its offerings has increased dramatically in the wake of the pandemic, leading to rapid growth in Roblox’s user base and revenue.
The spectacular growth of Roblox Corp led to a tremendous rally after the stock made its market debut on March 10, 2021, through a direct listing.
Unsurprisingly, Roblox’s valuation skyrocketed. The shares were trading at nearly 36 times sales last year. However, the stock’s severe crash this year brought the sale multiple down to 9. This means investors can buy Roblox at a much cheaper valuation. But should they buy that beaten tech stock right now?
More Pain Could Be in the Cards
Roblox Corp is struggling to sustain its meteoric growth in 2022. The company’s revenue in the first quarter of 2022 rose 39% year-over-year to $537 million, but a 3% drop in bookings from the $631 million company was a red flag. Indeed, Roblox bookings refer to the virtual currency with which users buy virtual items such as pets, accessories, and outfits in its 3D worlds. Bookings are recognized as revenue once Roblox users spend their virtual currencies on items.
So a slowdown in Roblox bookings means its revenue growth will eventually take a hit. Analysts expect Roblox bookings to grow just 4% in 2022 to $2.84 billion, while they grew 45% to $2.73 billion last year. Plus, Roblox user metrics for May 2022 indicate that its bookings are slowing at a more alarming rate.
The company’s estimated bookings for May fell 9% to 11% year over year to a range of $196 million to $199 million. In April, Roblox bookings were down 8-10%.
Those numbers show that users are spending less money on Roblox’s platform. However, analysts predict a 15.5% increase in Roblox bookings in 2023. Roblox revenue growth is also expected to accelerate over the next two years.
Metaverse to Drive Long-Term Growth
Demand for Roblox’s 3D virtual experiences is likely to surge due to significant growth in the metaverse market, which is expected to grow at a compound annual growth rate of 47% through 2027. Roblox has partnered with big names to ensure it stays on top of the metaverse opportunity.
In addition, the company plans to diversify its business by adding new revenue streams such as advertising, which could open up a significant long-term revenue opportunity.
Roblox recently opened a new data center in India to support the rapid growth happening in the region.
Roblox Corp has released new features over the past few quarters, including space voice and layered clothing for users’ digital avatars that management says will drive user growth, time on the platform, and growth opportunities.
Roblox could regain its mojo in the stock market once its growth picks up. But for now, it appears more prudent to stay on the sidelines.
About Roblox Corp.
Roblox Corp’s mission is to connect a billion people with optimism and civility. Every day, tens of millions of people around the world have fun with friends as they explore millions of immersive digital experiences. All of these experiences are built by the Roblox community, made up of millions of creators. We believe in building a safe, civil, and diverse community—one that inspires and fosters creativity and positive relationships between people around the world.
