Ahead of its second-quarter earnings report, markets sold off shares of Roblox (NYSE:RBLX). However, the gaming platform allayed fears when it posted respectable results. That said, RBLX stock is still relatively expensive compared to other video game stocks like Activision (NASDAQ:ATVI) or Electronic Arts (NASDAQ:EA).
Roblox trades at 19 times sales, compared to Activision and EA, which both trade closer to 7 times. So, what do investors see in Roblox that would justify an even higher valuation? The company is a global platform that draws in millions of people.
Here’s what you should know about RBLX stock moving forward.
Q2 Should Lift RBLX Stock
To start, this company saw strong results in Q2, which should help RBLX stock. For example, Roblox reported a 29% year-over-year (YOY) increase to 43.2 million for its average daily active users (DAUs). Revenue also jumped by 127% YOY to $454.1 million.
Of course, Roblox still lost some money. Total costs of around $597 million exceeded revenue. The firm spent over $100 million in developer exchange fees, infrastructure and research and development each. Meanwhile, general and administrative costs closed in at $97.7 million, well above the prior-year period.
However, as a growth company, investors must accept the rising costs needed to grow the business. Fortunately, developer exchange fee costs are declining quarterly. Roblox’s growth peaked in Q2 2020 (as shown on Slide 8). But as personnel costs moderate (excluding stock-based compensation), the company should eventually reach break-even profits.
Growth Opportunities Ahead
On top of the Q2 results, though, Roblox’s recent Guilded acquisition will complement its immersive 3D, metaverse platform. Guilded has a strong community platform and brings some social communication capabilities to the table. CEO David Baszucki noted that the acquisition will provide “an open way to experiment with the various ways these classes of applications work together.”
No doubt, the acquisition comes with the usual risks. If Roblox overpaid for Guilded, it will have to write down the goodwill value in the future. However, investors may assume for now that it can find synergies to cut costs and grow the platform.
In July, Roblox posted a 22% YOY increase in hours engaged, at 3.8 billion. Additionally, bookings were up by between 19% and 21% YOY while average bookings per DAU were in the range of $4.75 to $4.81. In my view, the general attraction to Roblox’s platform will only increase, thanks to the Guilded acquisition.
Risks and Rewards Abroad
Platform in mind, there are still other risks here for RBLX stock. For one, China’s crackdown on e-commerce and online education has extended to the gaming market. Roblox is a worldwide platform that complies with regional regulations. And it saw great content coming out of China — Livetopia, for instance, continues to receive updates and enhancements as one of the platform’s “top 12 experiences” in China.
In South Korea, however, Baszucki noted it saw a “top 10 experiences” ranking. So, its popularity in that country as well as the U.S. should offset any weakness from China.
On Wall Street, the average price target for RBLX stock is $89.83, according to Tipranks. That target does not imply it has much upside left. Because of that, cautious investors who are fearful of a Chinese crackdown on gaming or a correction in technology stocks could wait and watch first. Shares could fall briefly in the coming months, giving investors a better entry price. RBLX traded as low as $60.50 after its initial public offering (IPO) earlier this year.
Upside Catalysts and the Takeaway on RBLX Stock
Roblox boosted its staff levels to support the platform’s growth, increasing employees from 750 last year to 1,200. It’s concentrating its efforts on building the platform’s stability, security and safety for learning. When it comes to Roblox, parents don’t need to worry about their kids spending time in an unsafe online community. The company has created a positive place for people to connect. That should of course lift DAUs and increase future revenue.
Of course, citing continued innovation is a cliché. Still, Roblox also looks at its entire product stack, from the app to its gaming engine. It offers a strong developer tool that results in high performance and reliability at a low cost.
Lastly, RBLX attracts a wider spectrum of users across different ages. For example, a six-year-old can play an educational offering that will also interest teenagers.
This platform’s wide reach and popularity shows no signs of slowing. The company posted strong user activity in Q2 and, although people may soon spend more time offline and work less at home, they will not give up their time spent on Roblox.
All in all, RBLX stock is a growth name that technology investors should definitely consider from here.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.