Roblox Corporation (RBLX) registered a 6.1% surge in its stock price over the past month, as its fourth-quarter loss per share of $0.48 came in lower than what analysts expected. However, I think the stock is best avoided now for reasons discussed throughout this article.

The online entertainment platform allows users to interact with each other to explore and develop user-generated and 3D experiences and monetize them to earn an in-game currency called Robux. So, when RBLX’s bookings, which capture growth by counting virtual currency sales, also beat analysts’ expectations by registering a 17% year-over-year increase, the optimism surrounding the stock could be understood.

However, the stock has declined 12.6% over the past year to close the last trading session at $43.36.

Here are the factors that might affect the stock’s performance in the months ahead:

Weak Financials

For the fiscal year 2022 (ended December 31), 2although RBLX’s revenue increased 15.9% year-over-year to $2.23 billion, its loss from operations widened 86.6% year-over-year to $923.78 million.

The company’s adjusted EBITDA for the same period decreased 47.1% year-over-year to $356.46 million, while its net loss attributable to common stockholders worsened by 88% and 59.8% year-over-year to $924.37 million and $1.55 per share, respectively.

Poor Profitability

RBLX’s trailing-12-month gross profit margin of 16.38% is lower than the industry average of 49.63%. Similarly, its trailing-12-month EBITDA and net income margins of negative 35.67% and 41.54% stand out in stark contrast to the respective industry averages of 18.02% and 3.05%.

Moreover, RBLX’s trailing-12-month ROCE, ROTC, and ROTA also fall remarkably short of the industry averages of 2.96%, 3.54%, and 1.32%, respectively.

Discouraging Analyst Estimates

Analysts expect RBLX’s loss per share for the fiscal year 2023 to widen 13% year-over-year to $1.75. Losses are expected to increase by a further 3.3% year-over-year to reach $1.81 per share in the following fiscal year.

Moreover, RBLX missed consensus EPS estimates in three of the trailing four quarters.

Stretched Valuation

Despite the price decline over the past year, the stock is still trading at a valuation higher than in peers. RBLX’s forward EV/Sales multiple of 7.42 is significantly higher than the industry average of 1.87. Similarly, its forward EV/EBITDA multiple of 68.85 is higher than the industry average of 8.36.

Moreover, its forward Price/Sales multiple of 7.85 compares unfavorably to the industry average of 1.20.

POWR Ratings Reflect Weakness

RBLX has an overall F rating, which equates to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. RBLX also has an F grade for Stability, as indicated by its 24-month beta of 2.25.

RBLX has a D grade for Growth, in sync with bleak analyst estimates. It also has a D grade for Value and Quality, consistent with its stretched valuation and unimpressive profitability.

Unsurprisingly, it brings up the rear of the list of 19 stocks in the Entertainment - Toys & Video Games industry.

In addition to what has been discussed above, additional POWR Ratings for Momentum and Sentiment of RBLX can be found here.

Concerns

While the pandemic proved to be a major windfall for companies such as RBLX, with many users interacting virtually through its platform, reversal to pre-pandemic lifestyles has been a major headwind with user engagement losing momentum and metaverse hype fading, at least for the time being.

Moreover, macroeconomic uncertainties related to inflation and the increasing likelihood of an interest-rate-led recession have seen consumer spending on interactive entertainment decline more than publishers anticipated just a few months ago.

In fact, on September 9, 2022, it was reported that RBLX would introduce online advertising to diversify its income stream amid its ongoing battle against a slowdown in revenue growth. Its quest for profitability was further dented by its obligation to pay its creators for converting their Robux back to real-world currencies.

In March, RBLX announced that it would discontinue publishing its key metrics from May, citing its seasonal nature of business. In another filing in the same month, the company also disclosed that approximately 5% of its $3 billion cash and securities balance was held at Silicon Valley Bank, which has since been moved to another financial institution.

Bottom Line

In view of its weak fundamentals and an increasingly uphill path to profitability, it may be wise to steer clear of this stock until the company proves the sustainability of its business model.

Stocks to Consider Instead of Roblox Corporation (RBLX)

Unfortunately, the odds of Roblox outperforming in the weeks and months ahead are greatly compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) or B-rated (Buy) stocks from the Entertainment - Toys & Video Games industry instead:

Playtika Holding Corp. (PLTK)

SciPlay Corporation (SCPL)

DoubleDown Interactive Co., Ltd. (DDI)

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RBLX shares were trading at $44.72 per share on Tuesday afternoon, up $1.36 (+3.14%). Year-to-date, RBLX has gained 57.13%, versus a 3.62% rise in the benchmark S&P 500 index during the same period.

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.

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