Not Nearly Enough People Are Talking About Roblox Stock

Key Points

• Roblox stock has more than tripled in a year, thanks to strong business results.

• Management still has a massive growth opportunity ahead of it.

• If the company can achieve its goals, the current valuation could seem extremely cheap.

• 10 stocks we like better than Roblox ›

Roblox (NYSE: RBLX) shares have more than tripled over the past year, but the stock isn't getting nearly as much attention as several others with similar returns. While many investors avoid Roblox because of certain controversial aspects of the platform, the fact is that Roblox is evolving into an excellent business, and management is doing a good job of responding to concerns.

I first invested in Roblox because I believed it was set to be a massive beneficiary of the most exciting period in the evolution of metaverse technology, and given the company's results in recent quarters, I believe that more than ever.

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Image source: Getty Images.

Roblox: Strong growth and a massive opportunity

As mentioned, Roblox's recent results have been extremely strong. In the second quarter, Roblox's bookings (the best metric of revenue growth for the company) grew by 51% year-over-year. The platform has 111.8 million daily active users, 41% more than a year ago, and engagement is up by 58%, with a total of 27.4 billion hours on the platform.

Roblox isn't profitable on a GAAP net income basis, but the company generates excellent free cash flow (which grew by 58% year-over-year in the second quarter). Roblox recently swung to positive adjusted EBITDA as well, a big milestone, especially for such a fast-growing business.

Looking ahead, it's tough to overstate the growth opportunity here. Roblox has said that its goal is to ultimately scale to 1 billion active users, and if it can do that while continually expanding monetization, the stock could be a massive winner for patient investors. Management hopes to eventually have 10% of all global gaming revenue flow through the Roblox ecosystem. The global gaming market is expected to be about $600 billion by 2030, so this implies about $60 billion in targeted revenue (about 15 times the company's current revenue run rate). So, although Roblox's $94 billion market cap might sound like a lot today, this has multi-bagger potential if Roblox can even come close to achieving its goals.

Roblox has lot of adjacent opportunities as well in addition to its core gaming platform, such as applying Roblox's technology to education, and building out its content licensing platform. And the company has done a great job of rolling out innovative tools for its creators to help maximize engagement and monetization of their content.

Some concerns, but management is making the right moves

To be sure, there are some legitimate concerns about Roblox's platform, specifically when it comes to its popularity among children and young adults. And to be fair, as a parent of a seven-year-old who loves Roblox, this has definitely been a concern of mine.

Of course, this creates additional risk factors. But Roblox's management team has done a great job of addressing these concerns. A couple of months ago, Roblox announced Roblox Sentinel, and AI system designed to detect any child endangerment communications quickly. The early indication is that Sentinel is highly effective, and separately, Roblox announced a partnership with the International Age Rating Coalition (IARC) to ensure parents are more informed when it comes to allowing children to access age-appropriate content.

The bottom line on Roblox

Roblox isn't exactly a cheap stock at about 23 times trailing 12-month sales, but considering that it's a cash flow positive business that's growing by more than 50%, it might not be as expensive as it looks. In fact, if management can successfully navigate the path to 10% of global gaming revenue, it could be downright cheap. To be sure, there's a lot that will need to go well for that to happen, but Roblox's management team has already developed an impressive track record of making the right moves.

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Matt Frankel has positions in Roblox. The Motley Fool has positions in and recommends Roblox. The Motley Fool has a disclosure policy.