Is it time to buy this Metaverse promotion?

One of the hottest investment topics in 2021 was the metaverse. Taken from a 1992 science fiction novel Snow disaster Neil Stevenson, this term refers to the convergence of the physical and digital worlds in a shared online space. Ambitious big technology companies like Facebook many invest in this topic, as many consider it the next frontier of the Internet. One of the companies that pioneered the construction of digital worlds is Roblox (NYSE: RBLX). The company has just gone public this spring thanks to a direct listing, which has given investors of all sizes the opportunity to own part of this company from the metaworld.

Is it time to buy Roblox shares?

The man with the AR glasses.

Image source: Getty Images.

What is Roblox?

Roblox defines itself as a company that works together with people. Simply put, it provides software tools so that third-party developers can create their own video games and digital experiences through Roblox Studio. It has millions of developers who create games for the platform, but the company does not create the games themselves. Roblox developers make money by taking part of a game developer’s earnings.

The flow of commissions between developers, players and Roblox itself is controlled by an in-game currency known as Robux, which can be exchanged for real money in several different ways. Roblox sends part of this fee to apple and Googlemobile app stores, and spends a lot of money on building their own cloud infrastructure around the world. The company does not outsource Amazon Web Services, Azure or Google Cloud, but supports its own data centers.

As might be expected from a company that sells virtual currency, Roblox has a very high profit margin. In the second quarter of this year, the number of orders (revenue equivalent for video game companies) reached 665.5 million dollars, which is 35% more than last year. What is striking about this growth is that in the 2nd quarter of last year, Roblox saw a huge increase, when the number of orders increased by 229% from 2019 to 494.2 million dollars. This summer’s growth – compared to the summer surge of 2020 – shows that Roblox did not receive a temporary increase in use due to the blocking of COVID-19, even if they accelerated the growth of the platform.

In the second quarter, Roblox had $ 191.2 million in cash flow from operations, giving the company a 28.7% margin on net bookings, although the company continues to reinvest for growth. At the end of the second quarter, Roblox had 1,234 employees, up from 751 last year, 77% owned by engineers. This indicates that the company is spending heavily on future products and growth, which is important because of how many opportunities it is looking for.

Path to 1 billion users

With the last monthly update in August, Roblox had 48.8 million daily active users and 4 billion hours of work on the platform. Both indicators increased by about 30% compared to 2020. This may seem big, but the Roblox guide is focused on much greater possibilities. With tens of thousands of experiences with Roblox and developing on a fairly large scale, the platform can eventually offer the right experience / game for almost everyone. The long-term goal of the management is to reach 1 billion DAU and 1 billion hours of users daily on Roblox. A bold goal, but one that should excite investors.

To do this, Roblox will need to convince older people to join (most of its current users are children and teenagers), which it will do in several ways. The first is investing in better music and sound. In July, she signed a deal with Sony Music to bring artists to Roblox for concerts. He has just launched a feature called Listening Party, which allows artists to make exclusive music launches and allow fans to interact in the virtual world. Second, Roblox is trying to attract brands to sell digital goods. For example, in May, he had an experience called Gucci Gardens, which received 20 million visitors (and several high-margin purchases). In general, the company will constantly reinvest in its platform for developers, which we hope will allow developers to create an experience that will appeal to older people.

And what about the assessment?

Roblox is currently trading with a market capitalization of $ 46 billion. Given the nearly $ 200 million in operating cash flow last quarter, which is likely to grow steadily, it is not unreasonable to expect Roblox to reach $ 1 billion in annual cash flow soon. Such an increase will give Roblox a price-to-operating cash flow ratio of 46. If Roblox can eventually reach 1 billion users, and if the metaworld is a realistic vision for the future, the company could end up costing well over $ 46 billion, making stocks buying at such prices. . But if you do not believe in these opportunities and are not sure about the company’s development goals, then it is probably better to stay away.

This article reflects the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Advisory Service. We are colorful! Questioning the thesis of investing — even our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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