If you bought Roblox (NYSE:RBLX) in its March 2021 initial public offering, I hope you sold RBLX stock after its first day of trading.
Roblox shares were priced at $45. They closed the first day of trading up 54.4%. Since then, they’ve lost 20% of their value, but not before hitting an all-time high of $141.60 in November.
Given the ride it’s been on it’s hard to believe that its shares are trading just $10 from its IPO price almost a year to the day it went public.
Is this the end for Roblox stock? I doubt it. Here’s why.
RBLX Stock Was Bound to Come Back to Earth
In the three months from when Roblox hit its all-time high on Nov. 22 to its all-time low of $53.08 on Feb. 16, its market capitalization fell by 63%.
Most of the gains to get to its all-time high came entirely in November. Before November, its share price traded in a relatively tight range between $70 and $90.
The first question investors should be asking themselves is whether its first-day gains of 54% were imaginary or real?
I ask this because if you take the average first-day gain of IPOs from 1980 to 2020 — it’s 18.4% according to IPO specialist Jay Ritter — and apply that to RBLX stock, it closes out March 10, 2021, at $53.28, not $69.90.
By the beginning of June, it traded over $100. If you bought at the first-day closing price, you would have nearly doubled your money in two months.
So, it’s very possible that investor expectations got way ahead of themselves due to the 54% first-day gain.
Interestingly, I wrote about Roblox stock twice in 2021 — once in March and in April. That said, I haven’t written about the online platform for developing and playing games using virtual reality, augmented reality, and mobile devices.
When I first wrote about Roblox on the day it went public; I openly admitted I had no idea what it was or why it was so popular.
I only knew that a ton of people were playing games on its platform. According to CNN Business, people played more than 3 billion hours of games in July 2020 alone. That’s a lot of hours.
“I find Roblox to be one of the most interesting businesses to come to the listed market in a very long time,” I wrote. “Perhaps, I’m naïve to think that its online experiences will continue to draw people of all ages. But if nothing else, Covid-19 has taught me that life wasn’t perfect before the pandemic, and it won’t be after.”
Ultimately, I suggested that readers put Roblox on their watchlist. However, I never thought it would go on such a massive run in November, so the fact that it’s come back to earth doesn’t come as a big surprise.
Were Earnings Really That Bad?
Roblox reported Q4 2021 results on Feb. 15. On the top line, it had sales of $568.8 million, 83% higher than a year ago.
Its bookings were $770.1 million, 20% higher than a year ago.
On the bottom line, it lost $143.3 million (25 cents a share), 144.1% higher than its loss of $58.7 million (30 cents a share) a year earlier.
The bookings and revenues were in-line or reasonably close to analyst expectations. However, the 25-cent loss per share was almost double the consensus estimate of a 13-cent loss.
Morgan Stanley analyst Brian Nowak believes the results demonstrate that companies that benefited during the pandemic are now returning to earth. That totally makes sense.
But does this reality justify a $53 share price? I don’t believe it does.
Here’s what I said in April 2021:
“In 2020, Roblox increased its daily users by 85% to 32.6 million. The revenue growth was eerily close, up 82%,” I wrote on April 16, 2021.
“I believe it makes sense to invest in companies whose products investors frequently use — say, daily or weekly — which means as Roblox’s user base grows, so will its investor base.”
In 2021, its daily active users (DAUs) increased 40% to 45.5 million. Yes, that pace of growth was much lower, but if it can grow DAUs by 20% a year for the next five years, it will hit 100 million by the end of 2026.
Like Netflix (NASDAQ:NFLX) or Roku (NASDAQ:ROKU), or any other entertainment business that relies on user engagement, as long as Roblox’s DAUs, hours engaged, and average bookings per DAU keep rising, there’s no reason RBLX can’t revisit $100.
Best of all, it generated free cash flow of $558 million in 2021, 36% higher than in 2020.
From where I sit, I don’t have an issue with the yearly loss of $491.7 million. It’s part of scaling the business. With net cash of $2 billion, it’s got plenty to hold it over until the profits come. And they will come.
If you don’t own Roblox stock, this existential crisis investors are facing makes now the perfect time to buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.