1 Growth Stock Down 72% to Buy Right Now

16/03/2024

Are you willing to take a little extra risk for a chance at a lot of growth? It’s a common trade-off when picking stocks. If your answer is yes, consider stepping into a stake in video game outfit Roblox (NYSE: RBLX).

Roblox is not yet profitable, but persistent double-digit percentage revenue growth is pushing its bottom line in that direction. And the stock could start performing well again even before it gets into the black. Better still, share prices are down 70% from their all-time high. That discount could start shrinking soon, and it may never be available again.

Roblox isn’t exactly a game

You’ve probably heard of the company. Unless you’re a video gamer, however, you likely don’t fully understand what it is or does.

Roblox isn’t a video game in and of itself, nor even a developer of games (although it does have staff that do some developing). Rather, Roblox offers a platform that allows people to play in virtual gaming rooms that are created (mostly) by other video gamers. Some of its features are free to use. Others require payment. On the other side, Roblox shares part of its revenue with the people creating those online games. Last year, the company divvied up more than $740 million among 12,000 different game developers (although as you might expect, these payouts were far from evenly distributed — the best of the best collected the lion’s share).

It’s also one of the few multiplayer online gaming platforms that has remained interesting to gamers, perhaps specifically because developers have an incentive to keep the experiences they offer competitive. Last quarter, the average number of daily users rose 22% year over year to 71.5 million players. Clearly, Roblox is doing something right.

This is only half the story, though. While it looks as if its gameplay could remain relevant indefinitely, the company has another growth engine revving: the metaverse market.

The metaverse is finally getting traction

It’s no stretch to suggest the metaverse movement hasn’t lived up to the hype that was palpable just a few years ago. Most consumers still don’t understand it, nor do they care to. For the few who are interested, the cost of the necessary equipment to fully immerse yourself in a persistent 3D virtual world can be prohibitive. Meta Platform’s (NASDAQ: META) Quest goggles start at $250, and heavier-duty usage requires users to connect them to a high-performance smartphone or PC.

This is why of all the wide-ranging estimates of the total number of worldwide regular metaverse users, none of them peg the figure at more than a few hundred million, with most of them being kids and teenagers playing games such as Minecraft, Fortnite, and a select few on Roblox using computers and mobile devices.

And that’s not a daily user count, to be clear — that’s a monthly user figure.

This, of course, is the chief reason that so many software, game, and app developers aren’t prioritizing the metaverse anymore: Why invest time, money, and other resources in pursuit of a relatively small opportunity?

However, what if consumers, content developers, distributors, and the required underlying technology providers are all finally on the same page?

This may well be the case, according to a report from market research service Spherical Insights. It suggests the worldwide metaverse market is set to grow at an annualized pace of 45% through 2030. That view closely mirrors the expectations of Polaris Market Research and Precedence Research.

Great, but what’s this got to do with Roblox?

As it turns out, the same technology that makes Roblox a great virtual video-gaming platform is also well suited to creating virtual worlds for other purposes. Nike, for instance, relies on Roblox’s tech to host its promotional-minded digital universe. Beauty company Fenty is using a Roblox platform to engage with consumers as well; in its room, guests can custom-create their own virtual Fenty Beauty Gloss Bombs. Carmaker Hyundai is even offering people a virtual test drive of some of its new vehicles. And this is just a sampling. Other brands are also using Roblox’s virtual reality tech to create their own metaverse spaces. It is quickly becoming the preferred platform for brands looking to enter the metaverse fray.

Roblox stock isn’t for everyone, but a small stake might be for you

It’s not a stock that will be suitable for every investor’s portfolio, and it’s certainly not a “bet the farm” kind of pick for anyone’s portfolio … no matter how risk-tolerant you may be. This company is still losing money, and it is expected to remain in the red for the next few years even though its top line is expected to continue growing well. This dynamic can make even a great stock quite volatile.

On the flip side, in many cases, shares of an unprofitable company can still perform well simply because that company is making progress toward eventual profits. Roblox stock has been this sort of stock in the past, and could certainly become one again in the foreseeable future.

Despite the company’s past and projected losses, the analyst community is still bullish on Roblox stock in the near term. Most analysts covering the stock rate it as a strong buy, and the 12-month consensus price target of $49.46 is more than 20% above its current price. You could certainly take a crazier risk than to add it to your portfolio.