I can say with some conviction that Roblox (NYSE:RBLX) stock has been treated unfairly by the markets.
It’s true that all growth stocks have shed some valuation premium recently. Interest rate hikes and a possible recession in 2023 are among the underlying factors. Relatively lower growth for some sectors post-pandemic is another factor.
All these have come to play a role in a massive correction for RBLX stock. From all-time highs of $141.60, the stock is lower by 75%. I would be a contrarian at current levels and would consider adding exposure to possibly the best metaverse stock on the market.
Talking about the metaverse potential, it’s expected to be a $783.3 billion market by 2024.
So, what’s working in favor of Roblox, even as the stock sentiment remains gloomy?
I am encouraged by the trend in the company’s daily active user growth. For 2021, Roblox reported DAU growth of 40% to 45.5 million. In January 2022, the company’s DAU increased to 54.7 million and further to 55.1 million in February 2022.
On the flip side, the average bookings per daily active user have declined recently, and that’s of concern for the markets. However, it’s important to mention that for 2021, Roblox reported year-on-year revenue growth of 108%.
For February 2022, the company has estimated revenue growth of 60% to 63% on a year-over-year basis. If this trend continues through the year, growth metrics would still be attractive. The deep correction in RBLX stock seems to have more than discounted the growth deceleration.
Another trend in the daily active users that the markets seem to be missing is as follows: For Q4 2021, growth in DAU under 13-years of age was 21%. For the same period, DAU growth over 13-years was 49%. Besides regional expansion, Roblox is benefiting from user growth across a wider age group.
In terms of financials, Roblox reported adjusted EBITDA and free cash flow of $674 million and $558 million respectively for 2021. With strong user growth, FCF is likely to swell further.
It’s worth noting that Roblox made three strategic acquisitions in 2021. Healthy FCF will provide flexibility to pursue more acquisitions that drive growth.
Should Investors Buy RBLX Stock?
In my view, the worst is over for RBLX stock. The overreaction on the downside has presented an attractive entry opportunity.
Recently, Goldman Sachs downgraded Roblox stock to “neutral.” Goldman also trimmed the price target for the stock from $108 to $50. Even if we consider the significantly lower revised price target, RBLX stock has an upside potential of over 40% from current levels.
I would buy the stock for a sharp reversal rally.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.