There are very few opportunities in the stock market that offer discounts on great companies that are still not well-known but that grow at massive rates to become household names and Wall Street favorites in the near future. One of these stocks, with the sort of attractive discount investors would enjoy today, is Roblox Co. (NYSE: RBLX), whose stock has suffered a massive sell-off recently.

The stock had been on a tear for most of 2024, reaching a performance of up to 55% over the past 12 months, significantly outperforming the broader S&P 500 index by a margin of over 20% up to the previous quarter. Then, everything changed to bring the stock down to today’s level, a mere 83% of its 52-week high, and enough of a gap for value investors to fill.

However, the reasons for the sell-off should be considered, particularly because they are rooted in a targeted short report from Hindenburg Research. However, investors need to hear both sides of this story and compare the claims being made today against the key performance indicators (KPIs) coming out of Roblox so that an educated decision can be made.

Roblox Stock Drops Nearly 20%: Are the Reasons Behind the Sell-Off Valid?

The short report claims that Roblox is using fraudulent practices to measure the company’s KPIs regarding user growth and profitability. The firm also questioned Roblox’s ability to maintain a friendly and safe environment for the younger audience on the platform.

However, these safety concerns have no real evidence in the report and don’t single out Roblox. Meta Platforms Inc. (NASDAQ: META) is another technology stock that suffered its fair share of accusations from platforms like Facebook and Instagram, so this isn’t new in the industry.

Then, investors can double-check Roblox’s financial results away from the income statement (which can be manipulated with enough creative accounting) and focus on the cash flow statement. Companies that overestimate their earnings usually have a large divergence from their operating cash flow, so here’s Roblox’s.

As of the past quarter, the company’s earnings press release would show up to $151.4 million worth of operating cash flow, which acts as a proxy for operating income. This is a significant jump from last year's quarter, which only saw $28.4 million in operating cash flow, showing investors an increase of 433% during the period.

If Roblox were engaged in fraudulent measures and methods, they wouldn’t be able to fake these sorts of cash flow figures easily and consistently, which is why Wall Street analysts keep a bullish rating on the company.

Especially those at Wells Fargo, recently reiterating their “Overweight” rating on Roblox stock, along with a price target of $54 a share to call for a net upside of as much as 35% from where the stock trades today.

What’s Fueling Roblox Stock’s Growth, and Can the Momentum Continue?

To understand where these higher valuations come from, investors should check the company’s business model to determine what’s driving the company higher and, more importantly, whether this path can continue into the future. This time, investors can look to the company’s earnings presentation for an easier and quicker read.

Starting with daily active users, Roblox reports up to 21% annual growth this quarter, reaching a record 79.5 million users on the platform. Here’s what’s great about the company's demographics: users over 13 years old rose by 26% on the year, compared to only 15% for those over 13.

This means that Roblox is building a greater demographic of users closer to working and earning age, meaning further monetization probabilities beyond parent allowances act as a tailwind in the stock. More than that, it seems that management is doing the right thing regarding content.

Hours engaged rose by 24% on the year to reach a high of 17.4 billion, again seeing most of the growth in users over the age of 13 with 30%, compared to only 18% increases in hours engaged by users under 13. As a result, investors can see a revenue jump of 31% on the year to $893.5 million and a record free cash flow of $112 million.

Investors shouldn’t be surprised to notice a new institutional buyer heavily investing in Roblox stock. Allspring Global Investments Holdings now holds up to $81.9 million worth of Roblox stock after boosting their position by 195.8% as of October 2024.

At today’s prices, especially after a recent sell-off, investors could assume the stock could become one of their best buys for the quarter, if not for the year.