As I mentioned in my last article and Roblox (NYSE:RBLX), the company has great potential. However, I continue to believe that the weaknesses and threats of RBLX shares still outweigh its strengths and opportunities for now.
Among the company’s major weaknesses are generally slow growth in the third quarter compared to the second quarter, high increased spending and large losses. In addition, the valuation of shares remains quite high despite the recent decline. And in the threat category, Roblox faces stiff competition, including, most importantly, a looming challenge from Meta platform (NASDAQ:FB).
Problems with RBLX stock
Overall, the slowdown in growth amid the moderation of the Covid-19 pandemic remains a major problem for RBLX shares. In the third quarter (3rd quarter) of 2021, the company the average number of daily active users increased 31% year on year (YY) to 47.3 million. This increase has changed little compared to 29% year on year company growth reported in the second quarter.
However, year-on-year revenue growth slowed markedly to 102% in the third quarter, compared with 127% in the second quarter. Its increase in bookings in the third quarter fell to 28% year on year from 35% in the second quarter, while its average provision per daily active user was $ 13.49 in the third quarter, from $ 15.41 in the second quarter.
In the third quarter, Roblox’s “total costs and expenses” nearly doubled compared to the same period a year earlier, reaching a hefty $ 586.78 million. And “net loss attributable to ordinary shareholders” jumped to $ 74 million.
I like Palantir (NYSE:PLTR), Roblox excludes a very large amount of share-based compensation from its final result and cash flow calculations. Considering $ 221.7 million in share-based compensation of Roblox in the third quarter, its total net loss attributable to shareholders was a very large $ 298.9 million. As I have already pointed out, large amounts of share-based compensation directly harm shareholders by lowering the value of each share.
Increased valuation and strong competitive threats
RBLX shares hold in the last month fell by 17%.. Nevertheless, the shares are still traded at a forward price-to-sales ratio – based on the analysts’ average revenue estimate for 2022 – 15.75 times. This is a very high rating for a company that is extremely deep in the red numbers, reporting slower revenue growth and facing extremely strong competition.
Many of these companies, including Meta Platforms, along with video game makers Epic games, Microsoft (NASDAQ:IFFT), in Niantic – are very likely to develop metaverses that are in direct competition with Roblox’s core offering.
Meta Platforms CEO Mark Zuckerberg spoke about allowing Meta users to “attend virtual concerts or a fence with holograms of Olympic athletes. ” Apparently, such offers could attract many current Roblox users away from this company’s game.
And of course, Meta can market its metaverse offers to billions of consumers for free using Facebook, Instagram and WhatsApp. Meta is likely to help attract many users $ 58 billion in cash (from the end of the third quarter).
As for Epic Games, Microsoft and Niantic, they can all use their proven ability to develop engaging, market-leading video games to create popular metaverses. In addition, Microsoft will be able to take advantage of part of its a huge pile of cash of $ 130.6 billion market your metaverse. Of course, it can also market its metaverse to Xbox users and potentially some Microsoft Office users for free.
I would also not be surprised to see other major video game makers, including Activision Blizzard (NASDAQ:ATVI), Take two interactive ones (NASDAQ:TTWO), in Electronic Arts (NASDAQ:EA), develop their own metaverses.
Bottom Line on RBLX shares
Roblox, as I mentioned in my previous column, has several advantages, including impressive growth, good monetization, and an alliance with Hasbro (NASDAQ:IMA).
But given the many weaknesses of Roblox and the strong, competitive threat the company faces, I recommend avoiding RBLX shares at this point.
At the date of publication, Larry Ramer did not hold (directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has been conducting research and writing articles on U.S. stocks for 14 years. He was employed by The Fly and Israel’s largest business newspaper Globes. Larry started writing columns for InvestorPlace in 2015. Among his very successful, counter-choices were GE, Solar Shares, Ford, Exxon and Snap. You can achieve it StockTwits na @larryramer.