California-based online entertainment platform Roblox (NYSE:RBLX) empowers people to play video games and socialize in a vast, 3D, virtual world. Since the company was an early-stage entrant in the red-hot metaverse space, RBLX stock has generated major buzz on Wall Street.
Indeed, as the term “metaverse” gained traction in the financial news headlines, Roblox share price soared. However, as the old saying goes, trees don’t grow straight to the heavens.
In other words, even white-hot RBLX stock couldn’t just keep going up forever. All it took was a worse-than-expected user-growth update, and Roblox was suddenly out of favor with investors.
It’s funny how the tide of sentiment can turn so quickly. Contrarians who still believe in the future of metaverse-anchored gaming can take advantage of the market’s overreaction as Roblox’s news has not been all bad.
A Closer Look at RBLX Stock
Just to recap, RBLX stock debuted on March 10 of this year. Interestingly enough, the shares became publicly traded through the very first direct listing of 2021.
The stock actually began trading at $64.50 and finished its first day of trading at $69.50. Then its upward momentum accelerated as its price ramped up to a 52-week high of $141.60 in November.
Unfortunately, this moon shot wasn’t sustainable. RBLX stock fell quickly in November’s back half and continued declining in December, falling as low as $95 and change.
Experts often recommend avoiding buying sharply falling stocks in order to refrain from “catching a falling knife.”
Roblox has fairly solid support at $70, so it’s not a terrible idea to be patient and let its share price hit that critical price point before taking a position in the name.
A Subtle Bug
Some may assume that RBLX stock simply fell victim to gravity after flying too far, too fast.
Yet this wasn’t just an instance of Icarus flying too close to the sun. Rather, there were specific incidents that popped the shares’ bubble.
The first of these incidents took place in late October and early November, when Roblox reportedly experienced a three-day outage during the Halloween weekend.
This was a period in which the company would typically take in at least $15 million in revenue. So that three-day outage was a big deal for Roblox. Just as painfully, RBLX stock lost more than $1.5 billion worth of its market capitalization as a result of this incident.
Of course, Roblox CEO David Baszucki had some ” ‘splaining” to do. He claimed that the outage had been “especially difficult” as it involved a “combination of several factors.”
“A core system in our infrastructure became overwhelmed, prompted by a subtle bug in our backend service communications while under heavy load… This was not due to any peak in external traffic or any particular experience,” Baszucki explained.
A Possible Overreaction
Evidently, Roblox’s investors weren’t too impressed with the CEO’s account or at least Baszucki’s explanation didn’t prevent many investors from unloading all of their RBLX stock.
Fast-forward to mid-December, and Roblox released its usage statistics for the month of November. Investors reacted very negatively to the data, and they may have overreacted.
Roblox counted 49.4 million average daily active users in November, up 35% year-over-year. That sounds pretty good, if you ask me.
On the other hand, that figure was less than the 50.5 million average daily active users Roblox reported for the first 27 days of October.
That’s not a huge decline. And in November, Roblox generated estimated bookings of between $208 million and $211 million, up 22% to 24% YOY.
On top of all that, Roblox reported 3.6 billion hours engaged in November, representing a 32% YOY gain.
The Bottom Line
It’s not always easy to tread the line between optimism and caution.
Yet that’s the right approach to RBLX stock, given the investing community’s negative sentiment towards Roblox at the moment. Thus, it’s wise to let the share price continue on its likely path to $70 and then re-evaluate and take a long position in the name if you’re ready to do so.
On the date of publication, David Moadel 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.