A Top Contender In The Metaverse

The good bankers at JPMorgan (JPM) believe the metaverse will become a $1 trillion dollar industry. That is incredible growth when you consider in 2020, the metaverse was valued at $46B. 

For those unsure what the metaverse is, it’s a combination of virtual and augmented reality. 

One of the world’s richest men, Mark Zuckerberg, considers it the future, and the reason why he’s changed his company’s name to Meta, to reflect this big opportunity. 

And while the metaverse is still a relatively new concept to most people. Several companies have been working diligently to make it more mainstream. 

One of those companies is a recent IPO, Roblox (RBLX), which has amassed over 50M users on its platform.  

Among financial pros, Roblox is the top electronic gaming and multimedia stock search by a mile every month, even when Activision (ATVI) was all over the news.

It’s not a surprise given how popular metaverse investing has taken hold of retail and Wall Street.

So where does Roblox fit into all this?

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Roblox Corporation (RBLX) Business

Roblox Corporation  (RBLX) develops and operates an online entertainment platform. It offers Roblox Studio, a tool that teaches users how to code and learn computer science principles, animation, 3D design, and development. The Roblox platform stretches across the globe. 

It has over 29.1M developers who created over 11.1M experiences with 95.1B cumulative hours engaged. 

Roblox creators can earn from their game development. Since its inception, RBLX developers netted over $1B in cumulative earnings. 

The firm boasted 54.7M daily active users (as of January 2022). 

Bookings in Q4 2021 reached $770M, up 20% from Q4 2020, and up 80.5% compounded from Q4 2019. 

Bookings refer to Roblox’s virtual currency, Robux, which players can buy and exchange for avatar upgrades, in-game items, collectibles, and accessories. 

RBLX generates the majority of its revenues from Robux. 

Financials

RBLX saw explosive growth over the last 3 years. Revenues rose from $508M in 2019 to $1.9B in 2021, a gain of 377% 

Despite the massive spike in revenue growth, RBLX maintains an excellent gross margin at 74%. 

RBLX has a current ratio of 1.73. That means its assets are 1.73 times greater than its short-term liabilities. 

Moreover, RBLX has a quick ratio of 1.53. That means its highly liquid assets are 1.53 times greater than its short-term liabilities. 

One concern investors have is its debt-to-equity ratio which sits at 2.02. The company uses $2.02 for every $1 of equity. 

The good news is that the company generates positive cash flow both from operations and after capital expenditures.

Valuation

RBLX has a negative net income due to high research and development costs, infrastructure and trust & safety (related to content maintenance and development), as well as general administration costs. And while it is significant concern investors have, there are a few more potential red flags. 

For example, the firm has a price-to-sales ratio of 11.6, which is much higher than the S&P 500 average of 2.9. 

Additionally, the company’s price to cash flow is a whopping 39.48x, well above most of its peers. And its forward price to cash flow actually increases to 43.64x.

RBLX has grown revenue faster over the last year (107%) than Electronic Arts (EA) 72.9%, Take-Two Interactive (TTWO) 60.8%, Zynga (ZNGA) 63.7%.

However, all its other growth metrics are virtually nonexistent since the company doesn’t generate a profit on paper.

And from a gross profit margin standpoint, firms like EA  72.9%, TTWO 60.8%, ZNGA 63.7%, are all higher than RBLX which sits at 22.2%

Our Opinion – 5/10

RBLX has seen its shares take a massive dive in 2022, down significantly from its 52-week highs of $141.60. It has yet to reach a profit, and with rising interest rates being a concern, it has fallen out of favor from Wall Street. 

While we do believe RBLX has an excellent opportunity to be a major player in Web3 and the metaverse, it could be a few years before it reaches its potential. That’s why we don’t think you need to own this stock for the next 12 months. 

However, if you have a multi-year investment horizon, this could be worth picking up at these depressed levels.