Roblox: The Metaverse Is Dying Before It Lived (NYSE:RBLX)

The entire concept of the metaverse is really interesting. The idea that we can conceive, develop, build, and operate in a completely digital virtual reality makes us feel the like the future is here now. But folks, as companies have pursued this venture, billions of dollars are being burnt. Uptake has been slow, and while youth seem to enjoy it, translating the concept of the metaverse into true profit has proved elusive for the companies operating in this space.

Take Roblox Corporation (NYSE:RBLX), for example. This is a metaverse company, and their stock has been obliterated. The metaverse is “cool,” but real adoption and build out may be years away. It is in its infancy, and we believe the pioneers of this concept, at least some of them, may not exist in the future to see that metaverse really take hold. We are not predicting the demise of Roblox, but we are predicting that it is going to take much longer to see real investment success with a company like this as it continues to burn cash.

The just-reported Q3 earnings give us pause, and have us questioning investments in the space for now. Many investors have lost their shirts (at least on paper), and it could get worse. Let us discuss.

The metaverse is fading already

It sure seems like the metaverse is dying before it even lives. Roblox is involved in the metaverse. On the most basic levels, it is simply an app that allows users to play a wide variety of games, create games, and chat with others online. Overall, it is a unique combo of social media, gaming, and social commerce. Essentially, it is one cog in the wheel of the concept of the metaverse, where Roblox is its own virtual universe. Within the universe are so-called experiences, which are places where users can socialize, create their own little worlds, and even earn and spend virtual money. But the growth is fading out like a fad.

The platform itself is free, but users can make purchases within each experience. Creators who build experiences can get a portion of proceeds of sales of virtual money spent, with the rest going to the corporation. Long-term, if humanity spends more and more time inside these worlds, it opens up a whole new possible world for digital economies, advertising in the experiences, and more.

But we are just not there. Or are we there, but it is not catching on? Roblox is certainly popular, and they generate a ton of sales, but burn a lot of cash. The biggest issue is that growth has stalled, and the stock has been crushed because of it. It is tempting for contrarians and speculative traders to take up a position here, but we think lower prices are in store first. The results show the growth is dying, for now.

Growth slowing but sequentially positive

Now look, we are not saying the company is shrinking, but the rapid rate of growth is no more. Roblox is still delivering growth across many core operating metrics. There has been an expansion in the developer community who create experiences. And while the metaverse remains popular among many youth, competition is brewing as more and more entertainment businesses chase the metaverse and burn cash. This hurts early companies in the space like Roblox.

Here is the issue. Revenue growth was just 2% to $517 million. Quite anemic. There is still, however, growth in many other key metrics, but the company is no longer seeing the wildfire-like growth. We liked that daily active users were up 24% from last year to 58.8 million. Users were up, though hours engaged in aggregate were only up 20%. Suggests users may be spending a little less time on average overall. Bookings were better than expected at $701.7 million, up 10% year-over-year, but this is still moderate growth. Perhaps the largest negative metrics was that average bookings per DAU (ABPDAU) was down to $11.94, which was down 11% year-over-year. They also lost $0.50, which missed estimates handily.

Compared to Q2, there was sequential growth. There were 52.2 daily active users. So, that is welcomed, to see another 6 million users. The bookings were up from $639 million, but revenue was down about $75 million. Bookings are a better metric in our opinion, but it is worth noting. The problem is that the average booking per daily active users was $12.25, so we saw a sequential decline here.

With losses greater than 30% more than being expected, these metrics hone in on some of the issues. It could be that the new users to the platform are reluctant to spend until they have been involved in several experiences. There could be a lag effect there. But, overall, while user growth is nice, and total bookings rising is great, the company must determine how it can get users spending. As evidenced by the declining average revenue per user, the company is facing challenges there.

In context, virtual world experiences are incredibly discretionary. It is entertainment. There is a risk of a recession in 2023 that may hurt consumers. When times get tough, consumer discretionary spending tightens up. This is pure entertainment spending, and we believe the revenues and bookings could take a further hit in a recession.

Cash continues to be burnt. Net cash from operations was positive, but free cash flow was -$67.7 million. But cash and equivalents are in good shape at $3.02 billion, while long-term debt is $988.6 million. Interest expense, however, was offset by interest income, but keep in mind that debt will become more expensive in the future. Losses from operations, however, are ballooning over last year, as expenses widened.

Final thoughts

The bottom line here is that the Street is not giving any love to companies that are losing money. Roblox Corporation growth is slowing, and revenues per user are down. With the risk of a recession, metaverse oriented companies could get hit hard. User caution.