Investors are dumping growth stocks amid soaring inflation and tightening U.S. Federal Reserve policy, which could increase the cost of capital. With its share price down 37% year to date, Roblox (NYSE: RBLX) has faced the brunt of the crash. But it isn't all doom and gloom for this innovative video game maker.
Let's explore three reasons why investors should take a closer look at Roblox's potential to capitalize on the metaverse opportunity.
1. Roblox is a metaverse leader
The metaverse is a combination of technologies that can support interconnected virtual worlds. Analysts at Emergen Research expect the opportunity to expand at a compound annual growth rate (CAGR) of 43.3% (to $829 billion) by 2028 as advertising, e-commerce, and gaming companies take advantage of this exciting new medium.
It is still unclear how the metaverse concept will develop, but Roblox has already established itself as a potential leader in the space. Instead of focusing on augmented and virtual reality, it focuses on the social side of the equation -- which is arguably more important.
According to Roblox's CEO Craig Donato, "there's an incredible amount of innovation" that needs to occur on the social side of metaverse development. Roblox's edge comes from a unique business model where players create their own experiences.
User-generated content is incredibly sensitive to popular trends, which can help supercharge growth -- as evidenced by the success of platforms like Alphabet's YouTube and ByteDance's TikTok.
2. Roblox's audience is large and highly targeted
But investors don't have to look at other companies to understand the power of Roblox's user-generated content strategy. The platform is already a massive success in its own right. As of the third quarter, Roblox boasts 47.3 million daily active users (up 31% from the prior-year period). Its user base includes over half of U.S. kids under 16, according to management.
Roblox's jaw-dropping scale gives it a competitive moat for creating a metaverse (because a realistic virtual world will need a lot of people) and helps attract businesses looking to explore new forms of marketing.
In November, global athletic brand Nike created its own Roblox world called NIKELAND where users can play games and interact with friends. NIKELAND also features a digital showroom allowing users to outfit their avatar with products, which could eventually open the door for e-commerce. Reality TV star Paris Hilton has a similar project called
"Paris World" where users can explore the mansion and purchase virtual clothing.
What is Roblox worth?
With a price-to-sales (P/S) multiple of 40, Roblox trades at a significant premium to the S&P 500 average of three. And despite its stellar growth rate (revenue soared 102% to $509 million in Q3), its high valuation will scare some investors away. But Roblox's early leadership position in the potentially transformational metaverse opportunity helps justify its high price tag.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool owns and recommends Alphabet (A shares), Meta Platforms, Inc., Nike, and Roblox Corporation. The Motley Fool recommends Alphabet (C shares). The Motley Fool has a disclosure policy.
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