Spotlight: 1 Gaming Stock The Kids Flocked To

While investors are paying attention to Presidential debates, global conflicts, and inflation, kids have their attention somewhere else, and for many adults an opportunity lies unearthed as a result.

Roblox is a gaming platform that has resonated with kids, teens and young adults in particular. While revenues absolutely mushroomed higher during the 2020-21 period for obvious reasons, Roblox has not ceded those gains but rather has built upon them.

So, is it time to buy this gaming juggernaut that is so popular among kids and apparently cannot stop growing?

Key Points

• Roblox has been delivering impressive top line revenues for 3 years straight.
• While top line growth has been impressive and sustained, the bottom line has been a laggard.
• Investors are soured by the growing losses as revenues grow, leading to poor sentiment at this time.

Roblox Revenues Are Ridiculous

When Roblox posted revenues up 95.6% in the final quarter of 2020, many speculated that growth rates were unsustainable. Yet the following quarter, management reported the top line up 139.5% and the next quarter up 126.6%. That pace of growth ignited RBLX share price, which eclipsed $140 per share in Q4 2021.

Then the share price started to fall, and its descent continued, almost as if Wall Street knew that YoY revenue growth rates would have to slow. And they were right, but impressively management succeeded in reporting higher year-over-year growth in every single one of the past twelve quarters.  Even as the numbers grew large and the comparisons grew tougher to meet, Roblox continued to enjoy market traction and grow the top line.

So with the quarterly revenue figure hitting $700 million in the last quarter alone, what does the future hold for this gaming stock?

Is Roblox a Buy?

The big downfall for Roblox shareholders has historically been the failure of the bottom line to match the top line. While management has reported 12 consecutive quarters of revenue growth year-over-year, the earnings before interest and taxes reported each quarter has been in the red each and every quarter, and growing larger. The most recent quarter revealed that figure to be in the red to the tune of $300 million, a record high.

Poor gross margins have contributed to the unimpressive bottom line, and it’s also soured analysts sentiment with the consensus forecast being that the company will not be profitable this year either.

According to analysts now the upside opportunity for new buyers is about $5 per share with fair value sitting close to $45 per share. Given the volatility of the share price that doesn’t exactly infuse new investors with a whole lot of confidence.

As such, Roblox is a classic example of a stock has a great story and impressive growth but needs to convert the impressive top line to bottom line profitability at some point in the near future if it is to woo back institutional holders who can really drive it to higher prices. Even more importantly is to not lose more as it grows more, which seems to be the case now. Once Wall Street cottons on to a reversal in that trend, the upside for Roblox could be substantial, but for now, the financials don’t support an optimistic investment case.