RBLX

My Favorite Metaverse Stock Just Went on Sale

Metaverse gaming platform Roblox (NYSE: RBLX) posted generally strong first-quarter numbers, with bookings up by 19% year over year and a narrower-than-expected net loss. The company produced its highest free cash flow in a single quarter ever.

Roblox's user base continues to grow, with 77.7 million daily active users (DAUs) at the end of the first quarter -- up by more than 6 million since the end of 2023. Currently, 13% more users than a year ago are paying for experiences on the platform, and the average DAU is spending slightly more on the platform than a year ago.

However, the stock tanked by as much as 30% following its earnings report. Here's why it dropped and why the new, lower share price could be a gift to patient long-term investors.

Weak guidance

Roblox gave disappointing second-quarter guidance and lowered its full-year forecast. For the second quarter, Roblox expects a sequential decline in bookings and free cash flow of $16 million to $23 million, compared with $191 million in the first quarter.

Management lowered its full-year bookings forecast significantly, as well, and investors seem to be worried about slowing growth. Full-year bookings are now expected to fall in a range of $4 billion to $4.1 billion, down from a prior range of $4.14 billion to $4.28 billion.

On a positive note, guidance was raised for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), but the ability to maintain or increase growth momentum is by far the larger concern among investors.

Management is trying to reinvigorate growth

Roblox's management acknowledged that there was an unseasonal decline in engagement during the first quarter, with the user base growing faster than the number of hours spent on the platform. Management is attempting to boost growth and engagement through a few different strategies.

The company reintroduced platformwide events in mid-March and dynamic price floors on Marketplace items rolled out in February. In addition, the team has been working on improving the app's user experience.

Advertising is another big potential growth area in which Roblox is investing heavily. In April, Roblox announced a partnership with PubMatic and initiated its first real-world shopping test with Walmart. Plus, the company is rolling out video ads to all advertisers, which could grow into a big revenue source.

Massive long-term potential

Growth definitely could remain sluggish in the near term. Consumer spending is pulling back in many other discretionary businesses during this period of elevated economic uncertainty. But this is a business with massive long-term potential.

For one thing, metaverse technology is still in the early innings. The global metaverse market is expected to grow tenfold from its current level by 2030, and Roblox could be a big beneficiary -- especially as new metaverse hardware from companies like Meta Platforms and Apple gradually becomes more mainstream. Roblox is arguably the gaming platform most likely to benefit as augmented reality and virtual reality technologies evolve in the years ahead.

Roblox management believes it can scale the business to 1 billion DAUs over time. If it can do this while steadily increasing monetization through user engagement, advertising growth, and other initiatives, it could be a massive home run for patient long-term investors.

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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. Matt Frankel has positions in Roblox. The Motley Fool has positions in and recommends Apple, Meta Platforms, PubMatic, Roblox, and Walmart. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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