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The general knock against Roblox (NYSE:RBLX) stock is that all of its steam has dissipated as we move out of the pandemic and any associated lockdowns. Detractors argue that gaming and metaverse plays like Roblox became overhyped as they garnered high levels of engagement due to lockdowns. Now comes the hangover. They argue caution. But I’d argue that Roblox is an excellent opportunity now. It is a strong company in a fledgling industry with massive, if slowed, growth ahead.
Roblox has faltered since late 2021 due to multiple factors. One, the pandemic is perceived to be over. Now that Covid-19 is endemic, we have collectively decided to move forward in life. No more lockdowns mean less hype for a metaverse dependent upon people being indoors.
Second, Roblox is a growth stock. Growth stocks had their heyday in the midst of the pandemic as easy money policies were at their peak. It isn’t mere coincidence that RBLX stock suffered an inflection point in Mid-November when inflation concerns really began to take hold in the markets.
But these fears are overblown. Yes, Roblox saw quarters last year when revenue grew at a pace well above 100%. And in the most recent quarter reported in May, Roblox revenues grew a relatively slow 39%.
But investors have to remember that the metaverse is expected to grow roughly at that same 39% rate through 2030. The point here is that one could easily make the argument that Roblox remains in the midst of tremendous growth post-pandemic.
And that has some investors believing that Roblox is simply a steal at the present. The argument is that the 50.4 million daily average users in May, along with revenue that is expected to increase by 30% year-over-year, are signs too strong to ignore.
I agree with that notion, here’s why.
Roblox represents sustainable growth. What I mean here is that growth companies are going to continue to see funding drying up as rates continue to rise. Investors can’t be as risky when the cost of capital is higher because they have to pay back more money.
That’s a big problem for growth companies that often rely on outside investors. But Roblox has generated positive cash flow for each of the past five quarters. In other words, it can self-direct its own growth where most other growth companies can’t.
In low-interest rate environments, those types of growth stocks look equivalent to Roblox. But it has become evident that they aren’t the same. And that’s a big part of the reason that Roblox is one that can be considered a strong growth stock currently.
On the date of publication, Alex Sirois did not have (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.