Is It Time to Invest in Your Kid's Favorite Gaming Platform?

Broadly speaking, it has been a challenging month for consumer discretionary stocks. Over that period, the sector has performed the worst among the S&P 500’s 11 sectors after posting a loss of 5.72%. But while that corner of the market has been dragged down by underperformers in the auto and leisure industries, others have just been pulled into the whirlpool along with them.

That’s precisely the case for Roblox (NYSE: RBLX), which had posted a more than 140% year-to-date (YTD) gain through Sept. 29 when it hit its all-time high. However, since then, the stock has corrected by 36% and is currently testing critical support. 

Still, despite being a pre-revenue company, corrections after sizable run-ups in share price are considered healthy, especially for growth stocks. So is it time to invest in your kid’s favorite gaming platform? 

Gaming Is a Big Business, and Roblox Is Front and Center

Long gone are the days of 8-bit Nintendo (OTCMKTS: NTDOY) consoles and controllers with a directional pad and just two action buttons. More than 40 years since the Nintendo Entertainment System debuted in July 1983, a lot has changed.

The video game market is now a $300 billion industry, and according to market consultancy firm Grand View Research, it is expected to grow by a compound annual growth rate (CAGR) of 12.2% through 2030, when it is projected to exceed $600 billion in value. 

Put another way, that’s more than double what the industry is currently valued at, which is something that companies like Microsoft (NASDAQ: MSFT) and others are dialed into, with gaming being an increasingly important line of business for the Magnificent Seven member.

Grand View Research’s findings indicate that the industry’s expansion into cloud gaming and mobile accessibility is driving widespread user engagement and monetization opportunities. 

The video game industry is undergoing a profound shift, with Grand View noting that platforms are beginning to “revolutionize how content is delivered and consumed,” with these platforms enabling instant access to high-fidelity games without the need for expensive, high-performance hardware, significantly lowering entry barriers for players.”

That’s something Roblox has embraced from top to bottom. Not only is the platform online and user-generated, but it also enables people to create, share, and monetize immersive 3D experiences and games. That’s because the company’s business model is built around its virtual economy and creator ecosystem. 

The platform utilizes a virtual currency called Robux, which users spend on in-game items, avatar customization, and access to premium experiences. Developers can earn Robux through in-game purchases and subscriptions, and then convert their earnings to real-world currency through the Developer Exchange program. 

And those virtual dollars are starting to translate into real-world cash for both the company and its shareholders.

Although Not Profitable, Roblox Is Trending in the Right Direction

Roblox’s business model is already yielding positive results. The company hasn’t achieved full-year profitability yet, but there are indications that that could occur sooner than later. 

When the gaming platform provider announced its Q3 earnings on Oct. 30, it reported earnings per share (EPS) of 37 cents, which topped analysts' consensus estimates of 44 cents. And while Roblox missed on revenue with $1.36 billion falling below analysts’ consensus estimate of $1.64 billion, that figure marked a 70.3% year-over-year (YOY) increase.

Over the next year, earnings are expected to grow from -$1.49 per share annually to -$1.23 per share. The company’s net income losses have been decreasing, too, from $1.152 billion in 2023 to $935 million in 2024—good for a YOY decrease of nearly 19%.

Meanwhile, Q3 bookings showed a 70% YOY increase from the same quarter in 2024. Roblox bookings represent the total amount of money users spend on the platform—including subscriptions and on its digital currency, Robux—which in turn provides a key metric for the company and its investors. 

This trend continues, with the company’s net cash from operating activities increasing by $369 million in 2023 to $822 million in 2024, representing a nearly 123% increase over just two years. 

What Wall Street Thinks

It never hurts to scrutinize where the so-called smart money is investing its dollars. Specifically, institutional ownership can provide clues about where Wall Street believes a particular stock or exchange-traded fund is heading. 

On average, institutional ownership of a large-cap company is approximately 70% of its float. For context, Palantir (NASDAQ: PLTR) currently has institutional ownership of just 45.65%, as investors express concerns about the stock’s valuation in relation to the growing AI bubble.

Roblox currently boasts institutional ownership of 94.46%, while short interest stands at just 3.00% of the float.  

The stock also receives a vote of confidence from analysts. Of the 31 who cover Roblox, 20 assign it a Buy rating, and the average 12-month price target for RBLX is $136.41—or nearly 51% potential upside from today’s share price. 

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