As I noted in my last article on Roblox (NYSE:RBLX), the company has a great deal of potential. But I continue to believe that RBLX stock weaknesses and threats, for now, still meaningfully outweigh its strengths and opportunities.
Among the company’s most important weaknesses are its generally slow growth in the third quarter versus the second quarter, its huge spending increases, and its large losses. Additionally, the shares’ valuation, despite their recent decline, remains quite elevated. And in the threats category, Roblox is facing massive competition, including, most importantly, a looming challenge from Meta Platforms (NASDAQ:FB).
Problems for RBLX Stock
Generally slowing growth amid the easing of the Covid-19 pandemic continues to be a big issue for RBLX stock. In the third quarter (Q3) of 2021, the company’s average daily active users climbed 31% year-over-year (YOY) to 47.3 million. That increase was little changed versus the 29% YOY growth that the company reported in Q2.
But its YOY revenue growth slowed markedly in Q3 to 102%, compared with 127% in Q2. And its Q3 bookings increase dropped to 28% YOY from 35% in Q2, while its average booking per daily active user was $13.49 in Q3, down from $15.41 in Q2.
In Q3, Roblox’s “total cost and expenses” nearly doubled versus the same period a year earlier, coming in at a hefty $586.78 million. And the company’s “net loss attributable to common stockholders” jumped to $74 million.
Like Palantir (NYSE:PLTR), Roblox excludes a very large amount of stock-based compensation from its bottom-line and cash flow calculations. Factoring in Roblox’s $221.7 million of stock-based compensation in Q3, its total net loss attributable to stockholders was a very big $298.9 million. As I’ve pointed out previously, large amounts of stock-based compensation directly hurt shareholders by lowering the value of each share.
An Elevated Valuation and Intense Competitive Threats
RBLX stock has fallen 17% in the last month. Yet, the shares are still trading at a forward price-sales ratio — based on analysts’ average 2022 revenue estimate — of 15.75 times. That is a very high valuation for a company that’s extremely deep in the red, is reporting slowing revenue growth, and is facing extremely intense competition.
Many of these companies, including Meta Platforms — along with video-game makers Epic Games, Microsoft (NASDAQ:MSFT), and Niantic — are very likely to develop metaverses that directly compete with Roblox’s core offering.
Meta Platforms chief executive officer Mark Zuckerberg has talked about enabling Meta’s users to “attend virtual concerts or fence with holograms of Olympic athletes.” Obviously, such offerings could lure many of Roblox’s current users away from that company’s game.
And, of course, Meta can repeatedly market its metaverse offerings to billions of consumers for free using Facebook, Instagram and WhatsApp. Also likely to help Meta attract many users is its $58 billion of cash (as of the end of Q3).
As for Epic Games, Microsoft, and Niantic, they can all use their proven ability to develop captivating, market-leading video games to create popular metaverses. Moreover, Microsoft will be able to utilize a portion of its gigantic $130.6 billion cash pile to market its metaverse. It may also, of course, market its metaverse for free to Xbox users and potentially to some users of Microsoft Office.
Nor would I be surprised to see other major video game makers, including Activision Blizzard (NASDAQ:ATVI), Take Two Interactive (NASDAQ:TTWO), and Electronic Arts (NASDAQ:EA), develop their own metaverses.
The Bottom Line on RBLX Stock
Roblox, as I noted in my previous column, has multiple strengths, including impressive growth, good monetization, and its alliance with Hasbro (NASDAQ:HAS).
But given Roblox’s many weaknesses and the intense, competitive threat that the company is facing, I recommend avoiding RBLX stock at this point.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, Ford, Exxon, and Snap. You can reach him on StockTwits at @larryramer.