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Should I buy Roblox stock for my portfolio?

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One stock that’s been getting plenty of attention this week is Roblox (NYSE: RBLX). It came to the US market on Wednesday through a direct listing. Investor demand for the stock was so high that its share price jumped more than 50% on the first day of trading.

Is this a stock I should consider for my own portfolio? Let’s take a look at the investment case.

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Roblox: business description

Roblox is a video gaming company that offers an online game platform and game creation system. Its mission is to build a human ‘co-experience platform’ that enables users to come together to play, learn, communicate, explore, and expand their friendships.

Roblox’s platform allows users to program games and play games created by other users. At the core of the platform is a virtual currency called ‘Robux’. This allows players to buy various items within the platform. Users can either buy Robux with real currency or earn it by designing games.

The Roblox platform is very popular among gamers. According to the company, it is now ranked as one of the top online entertainment platforms for audiences under the age of 18, based on average monthly visits and time spent.

Strong growth

Roblox is certainly growing at a rapid rate at the moment. In a recent update, the company advised that for quarter ending 31 March, it expects:

  • Daily Active Users (DAUs) of around 37.6m-39.6m, representing year-over-year growth of 59- 68%.

  • Revenue of $320m-$335m, representing year-on-year growth of 98-107%.

However, it’s worth pointing out that year-on-year growth isn’t expected to be as impressive in the second quarter of 2021. That’s because the company is facing tougher comparables. For Q2, the company expects:

  • DAUs of 34.5m-36.3m, representing year-on-year growth of 3-9%.

  • Revenue of $350m-$372m, representing year-on-year growth of 75-86%.

Overall, for the full year 2021, Roblox expects:

  • DAUs of 34.6m-36.4m, representing year-on-year growth of 6-12%.

  • Revenue of $1.4bn-$1.5bn, representing year-on-year growth of 56-64%.

Should I buy Roblox stock?

I’m bullish on the prospects for the video gaming industry. This is an industry that is expected to grow substantially in the years ahead. According to Mordor Intelligence, the global gaming market will be worth nearly $300bn by 2026, up from about $160bn in 2020.

I already have a decent-sized position in Keywords Studios, a company that provides technical services to all the big game developers. I also have a large position in Microsoft, which owns Xbox. I could be tempted to add more gaming exposure to my portfolio.

I have reservations about investing in Roblox right now, however. That’s because the stock’s valuation is very high. At its current share price of $74, the market cap is about $41bn. That’s a massive increase from the $4bn valuation investors assigned to the company in a funding round early last year.

If we assume the company generates revenue of $1.5bn for the year, the stock’s price-to-sales ratio is a high 27. That’s too high for me. We‘ve seen recently that stocks with sky-high price-to-sales ratios can be crushed in a sell-off. I’m not comfortable with that risk.

RBLX: my view

In summary, Roblox looks like an interesting company. However, the valuation is too high for me. All things considered, I think there are stocks that are a better fit for my portfolio right now.

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Edward Sheldon owns shares in Microsoft and Keywords Studios. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Microsoft. The Motley Fool UK has recommended Keywords Studios. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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