My kids sat me down for slide presentations on their school-issued Chromebooks detailing what they want for Christmas. Appalling, sure, but I figure they’re building IPO roadshow skills that could pay off in a future easy-credit cycle.
Both lists included Robux, the digital currency of
(ticker: RBLX). Since its first day of trading in March 2021, its market value has fallen from $38 billion to under $17 billion. Growth stocks have struggled in general this year, and Roblox suffered two recent one-day pummelings: 21% in November, when it reported a bigger-than-expected loss, and 16% this past Thursday, when it disclosed a sales-growth slowdown in November.
How is Roblox not America’s most prosperous company? Its daily average users hit 56.7 million in November, up 15% year over year. And its business economics could make a 19th century coal mine scrip store jealous.
Most Roblox users are kids—half are under 12. They ask their parents for Robux to spend on hoodies, pets, dance moves, and more for their avatars. The company sets the exchange rate: For $9.99, you get 800 Robux. You can sweeten the rate by buying in bulk or signing up for Roblox Premium with recurring purchases.
Users develop the games and digital merchandise. Roblox collects 30% of purchases—to start. For developers to convert their earnings to cash, they have to make 100,000 Robux. Most games flop, so users plow their Robux back into the game, or spend it on platform advertising to lure players. If a developer succeeds in earning 100,000 Robux, the exchange rate for sales will get them $350, even though the best exchange rate for purchasing that many Robux would cost $1,000. Also, only Roblox Premium users can sell.
Last year, Roblox had $559 million in free cash, up from $468 million the year before. But free cash is expected to turn negative this year, and only minimally positive next year. The company is hiring and investing in its cloud platform and new features—one of these will allow avatars to mimic player facial expressions read by webcams.
Roblox sits on $3 billion in cash. Management says its spending surge will pay off in 2024 and beyond. It points out that its fastest user growth has been among young adults, that it has vast potential overseas, and that its ambition is to connect a billion people.
But even Needham analyst Bernie McTernan, who rates the stock at Buy, calls engagement trends “concerning.” That 15% November rise in daily average users was less than half last year’s pace. Estimated bookings—the company’s term for sales activity on its platform—were up only 5% to 7%, versus 22% to 24% in the same month a year ago. That means that bookings per daily average user fell.
Mike Hickey at Benchmark Co. rates the stock at Sell and has a long list of dislikes. Most kids who play don’t pay, and so might not be loyal. And parents who pay don’t generally play, so they’re emotionally disconnected from Roblox, and could stop spending in a downturn. The investment surge despite operating challenges leaves Hickey “astonished.” Shares remain “painfully expensive.” Management has a “lack of clear vision and discipline.” The pandemic pulled growth forward. And so on.
Shares of Roblox sell for six times sales, versus four times for game maker
(EA), and three times for social-metaverse-whatever
Personally, I might have to stiff the kids on Robux this Christmas. They’re busy with basketball, and my wife has developed a screen-time reduction strategy that involves hiding the iPads and forgetting for long stretches where she put them—genuinely, she swears. So, Roblox play is down, and I’m not looking to step in with fiscal stimulus.
The January effect—the tendency of shares to shine near the beginning of each year—seems to have disappeared. One theory on why it ever existed is that investors wait until the last minute to sell losers for the tax write-off, pushing prices artificially low. But falling stock commissions and rising computer assistance in trading have allowed investors to exploit the anomaly out of existence.
If there’s still a January effect out there, it would have to exist in a corner of financial markets so awkward and crusty that most investors pass it by.
Perhaps you’ve heard of closed-end bond funds.
They’re unpopular on the whole; for every $1 in closed-end funds, there’s $110 in open-end ones, including exchange-traded funds. But closed-end funds are passionately embraced by their fans. They like that they can buy shares that trade at big discounts to net asset values, with yields that top what’s on offer in bonds. Such & Such Municipal Advantage Quality Opportunities Strategic Income fund, they’ll point out, pays the equivalent of 8% taxable yield for high-income investors.
I’m not a fan. Many of the funds are Frankensteined up with leverage, which adds risk and defeats the point of buying bonds. There’s a better way to generate more income from a standard stock and bond portfolio: sell stuff when you need money. Also, the fees range from unsettling to atrocious.
But thin trading volumes, big yields, and the fact that bonds have gotten wrecked this year make these funds candidates for a January effect flip. I ran a screen for closed-end funds that lost at least 20% back in 2018, another bad year for bonds, but gained at least 10% from the last weekend that December through Valentine’s Day. It turned up dozens, including
Nuveen Municipal High Income Opportunity
Invesco High Income Trust
Neuberger Berman High Yield Strategies
Some caveats: Long-term saving beats flipping, so abstain, or keep bets small. And holding leveraged bonds or junk when interest rates are rising and the economy might roll over is risky, so don’t stick around for long.