Roblox Stock Soars Higher After Investor Update: Should You Buy Now?

Roblox (RBLX 15.36%) updated investors by posting its Q1 2022 earnings on May 10. The company then held a conference call to discuss the results the morning after the announcement. Investors liked what they heard from the pioneer of the metaverse, and the stock price is skyrocketing.

The stock was under pressure for several quarters as investors worried about how customer engagement would adapt as economies reopened. The update eased some of those concerns, but Roblox stock is still down 80% from its high, even after the recent spike. Let’s take a closer look at some of the first quarter numbers and determine if investors should buy the stock now.

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Roblox is capitalizing on an untapped opportunity

Please note that Roblox is free to join and use and is more popular with the younger population. The company makes money by selling an in-game currency called Robux. Some items and experiences on the platform require Robux to enjoy and are not available to non-paying players. As of April, Roblox had 53.1 million daily active users, up 23% from the same period last year. Surprisingly, it added players even as economies reopened and children returned to classrooms.

RBLX Revenue Chart (Yearly)

RBLX revenue data (annual) by YCharts.

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That said, there are still signs of a continued slowdown in some parts of their business. For example, user engagement in the US and Canada, its most lucrative region, fell 10% year-over-year in the first quarter. That was the fourth consecutive quarter that engagement did not grow year-over-year. Additionally, average bookings per daily active user (ABPDAU) are falling. In the first quarter, ABPDAU fell 25% from the same period last year. Once again, it was the third consecutive quarter of decline and it is accelerating down. There was certainly enough bad data to satisfy the investor with a glass half empty.

However, there was more good news than bad. Management noted that in April, booking trends improved from March. For several quarters, the company had been saying it expected declines in bookings to reverse in the months of May through June, and it appears that estimate was correct. If the trend continues, it could mean that the headwinds to reopening economies have subsided and Roblox could accelerate growth.

Finally, as mentioned above, Roblox makes money mainly by selling Robux. That means that millions of players use the platform daily and are not monetized. Undermonetization was an untapped opportunity that investors wanted management to capitalize on. In a letter to shareholders that accompanied the earnings release, management spoke at length on the subject:

We are now increasing our focus on improving monetization per hour of time spent on our platform across all demographic ages and around the world. As we improve hourly monetization, we expect to see additional growth in gross revenue. Our dedicated Economics team focuses on three main areas: Discovery, Advertising, and UGC [user generated content] catalog.

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The opportunity could be huge. During its first quarter of 2022, Roblox was only making money from roughly 14 million of its players.

Roblox stocks are far from expensive

Free Cash Flow Chart at RBLX Price

RBLX price to free cash flow data by YCharts.

Even after the surge that followed the earnings release, Roblox stock isn’t expensive. With a price-to-free cash flow ratio of 25, it’s still near the lowest in years. Investors can certainly start buying Roblox stock in chunks, adding more with each quarter that Roblox demonstrates a diminishing headwind from reopening the economy.

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