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Roblox (NYSE: RBLX) went public via a direct listing on March 10, 2021, and its stock opened at $64.50. Investors were initially impressed by the gaming platform's rapid growth, and its stock hit an all-time high of $134.72 on Nov. 19, 2021.

However, Roblox's stock now trades more than 70% lower at about $38 a share. It lost its luster as it faced tough year-over-year comparisons against its growth spurt during the pandemic, and rising interest rates further compressed its valuations. That was a steep drawdown, but it might represent a good buying opportunity for patient investors.

Roblox is still growing rapidly

Roblox's gaming platform enables its users to create games with a simple block-based system that doesn't require any coding knowledge. That approach made it popular with tween players during the apex of the pandemic in 2020 and 2021.

Roblox sells its own virtual currency, Robux, which can be used to purchase in-game content from its creators. That creator-driven flywheel makes it more comparable to YouTube or TikTok than a traditional video game company. Its popularity among younger users has also driven companies like Nike and Sony to create virtual metaverse worlds on its platform.

Roblox's growth in bookings, daily active users (DAUs), average bookings per daily active user (ABPDAU), and hours engaged all decelerated in 2022 as it lapped its pandemic-driven growth spurt. But in 2023, its growth in bookings and hours engaged accelerated, its DAUs continued to rise, and its ABPDAU growth stabilized.

That stabilization was driven by its overseas expansion beyond the U.S. and Canada, which was amplified by its growing popularity among older users. But both of those cohorts generated lower revenue per user than its core market of tween users in the U.S. and Canada, so it still struggled to grow its ABPDAU even as it gained more DAUs.

In the first quarter of 2024, Roblox's bookings grew 19% year over year, its DAUs rose 17% to 77.7 million, its ABPDAU rose 2% to $11.89, and its hours engaged grew 15% to 16.7 billion. Its growth is still decelerating as its business matures, but it could still have plenty of room to expand before its bookings growth actually cools to the single digits.

For the full year, Roblox expects its bookings to increase by a range of 14% to 16% to between $4 billion and $4.1 billion. Based on that estimate and its enterprise value of $24.1 billion, it looks reasonably valued at 6 times this year's sales. Analysts expect it to continue growing its bookings at a compound annual growth rate (CAGR) of 16% from 2023 to 2026.

Its profitability is gradually improving

The bears will point out that Roblox is still deeply unprofitable on a generally accepted accounting principles (GAAP) basis. Three headwinds are preventing it from breaking even: its high developer exchange fees (the cost of exchanging its developers' accumulated Robux back to real-world currencies), its cloud infrastructure costs, and its rising investments in tighter safety and security measures to protect its younger users.

The bulls will tell you that Roblox's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) -- which mainly excludes its deferred revenue -- turned positive in 2021. It changed the way it calculates its adjusted EBITDA at the start of 2024, and it expects that figure to come in between $95 million and $147 million for the full year. Roblox looks a bit pricey at nearly 200 times the midpoint of that estimate, but that forward EV/EBITDA ratio could decline as economies of scale kick in.

Why Roblox could be a turnaround play

Roblox doesn't face any meaningful competitors, the company is's expanding its audience, and its long-term growth should be driven by the creator class of users. Its business model might seem wobbly, but its $2.5 billion in net liquidity at the end of the first quarter still gives it plenty of breathing room to scale up its business.

If Roblox ramps up its monetization of older and overseas users, attracts more brands to its metaverse platform, and gradually narrows its losses, its stock could head a lot higher over the next few years. That's a lot of ifs, but Roblox looks ready to tackle these challenges.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike and Roblox. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.