As company after company falls due to normalization of user growth following pandemic pull-forwards in prior years, Roblox (RBLX) remains on the chopping block. The stock is already down 55% from the highs and the new short report from The Bear Cave could easily push Roblox down to new lows. My investment thesis is no longer ultra-Bearish on the metaverse gaming stock at $ 60, but Roblox is likely to trade lower before hitting bottom.
Users Pulled Forward
As highlighted back in my December research report following the release of the November platform metrics, Roblox was a big user growth giveback story. DAUs (daily active users) were only up 35% in the quarter with hours engaged up 32% followed by just 23% growth in bookings.
Roblox saw the user base soar from 19.1 million users to end 2019 to 33.4 million by Q2’20. The gaming platform saw users surge another 40% over the next year to reach 47.3 million DAUs in Q3’21. The company was on a pace for 50.5 million DAUs prior to outage at the end of October. The November numbers show Roblox unable to recapture the peak user numbers from October.
Over the course of the pandemic, the user base was up ~ 150% with peak growth rates reaching nearly 100% YoY during most of 2020. As my previous research highlighted, Roblox would not even have 40 million DAUs now, if the user base had only grown at a 40% annual clip similar to the growth rate in Q4’19 before COVID-19 shut down the global economy. In essence, the company has over 10 million in excessive DAUs, reducing the ability to grow from the higher user base level.
Quarterly numbers from Pinterest (PINS) to Meta Platforms (FB) question whether Roblox can report any growth at all. All of these platforms eventually ran into more competition and a likely issue with kids generally back in the classrooms and focused on schoolwork as Q4’21 progressed.
Child Porn Allegations
The site relies heavily on users under 13 despite a push to bring on older users. One has to wonder if mixing these groups is ideal for child safety.
For the Q3’21 earnings, the U13 crowd was 23.1 million for nearly 50% of the user base. Roblox had grown the 13O group at a much higher 48% clip during Q3’21 in a move to not be so reliant on a very young cohort.
The Bear Cave has issued a new short report on Roblox claiming the site and corporate culture is rife with acceptance of child pornography. YouTube, owned by Alphabet (GOOG, GOOGL), went through a similar period in 2017 where questionable videos of children were popping up on the site with thousands of views and disturbing comments. The Verge even covered additional allegations a couple of years later where YouTube clearly hadn’t solved all of the issues with soft-core child porn and disturbing comment streams.
YouTube was able to clean up the issue from the market view (or at least sweep it under the rug) to where the Alphabet division reported record Q4’21 ad revenues of $ 8.6 billion, up over 25% from Q4’20 levels. The soft-core porn allegations at YouTube hardly slowed down the business over some initial stumbles.
The big question is how Roblox reacts to the report questioning employees at the gaming platform. The company must address the allegations and make changes in leadership to move away from any lingering impact of fears that Roblox does not protect children online. The statement to Seeking Alpha suggests zero tolerance, but the company does not suggest any moves to solve how all of the questionable actions take place on the site.
Far Too Expensive
The stock is far too expensive considering the slowing growth issues and these allegations by the short report. Roblox now trades at closer to 9x forward sales targets, but revenue growth is forecast to fall down to only 20%.
The stock has only fallen 7% on a day with a major allegation against the company and Meta Platforms crashing the related tech sector stocks. Roblox has not even approached the lows below $ 54 hit last week on the market selloff.
The trading action is actually bullish for the stock, suggesting a lot of the allegations in this report already funneled through the stock. Unfortunately, Roblox just isn’t appealing here trading at over 11.5x current year revenue targets while the company faces allegations that could hurt users and analysts only forecast 20% revenue growth going forward.
The key investor takeaway is that Roblox just isn’t cheap enough based on the slowing growth issues and these child porn allegations that could hit user totals in the U13 crowd in the short term. Ultimately, the company is likely having a YouTube moment where the business bounces back to all-time highs in short order.
Roblox is due for another selloff before the stock becomes attractively valued. Let the stock hit the chopping block again, then snap up the metaverse stock.