China Is Cracking Down on Video Games: What That Could Mean for Roblox Stock | The Motley Fool

The Chinese government recently announced new rules for its citizens designed to decrease the amount of time children spend playing games. The move is likely to decrease engagement from gamers in the region and could hurt some gaming stocks. 

For instance, the popular gaming platform Roblox (NYSE:RBLX) is heavily dependent on engagement from gamers under 18 years old, which is the age group that the Chinese government’s restrictions are aimed toward.

Let’s look at what China is requiring in more detail and determine how the new rules could affect Roblox stock, if at all. 

Image source: Getty Images.

The new rules could slow Roblox’s momentum in the region

The Chinese government’s new rules will limit those under 18 to playing video games with an online component for a maximum of one hour a day — 8 p.m. to 9 p.m. — on only Fridays, Saturdays, and Sundays. They can also play for an hour, at the same time, on public holidays. China’s state media service says the rules aim to curb gaming addiction.

Roblox is free to join and makes its money by selling in-game currency called Robux. Of course, the fewer hours people spend playing games, the less opportunity for Roblox to earn revenue. Still, the company had been dealing with time limits on gaming in China before — although the new rules are stricter.

Roblox does not break out how many players it has in China. But it does say that out of its 43.2 million daily active users, 7.2 million of those are from the Asia-Pacific region, where presumably China is the biggest contributor. Making up roughly 17% of its DAUs, the region also accounts for 18% of overall engagement on the platform. 

The two regions that bring in more players and engagement for Roblox are North America and Europe. Importantly, North American and European engagement decreased by 9% and 2%, respectively, in the most recent quarter from the same time last year as economies reopened.

But engagement this past quarter increased from the Asia-Pacific region by 49% from the year prior. The new government crackdown threatens to halt some of the momentum that Roblox was gaining in the populous region.

What this could mean for investors 

Roblox is already facing headwinds as economies reopen and kids return to school. The trend has shown up in the company’s results with the aforementioned decreases in engagement. The difference here is that the China rules are still just announcements. It remains to be seen how they will impact gaming behavior in the region. It’s not likely to have a positive effect on any important metrics, but it does have the potential to cause some harm. 

Significantly, Roblox investors did not react much to the rule-change announcement and the stock price is up about 3.3% in the last 30 days. The shares are not cheap, trading at a forward price-to-sales ratio of 18.3, near the highest point of the year, despite the negative effects of reopening economies and the news out of China.

The risks to Roblox look to be on the downside. Investors interested in adding the stock could be better served by waiting for a substantial pullback in the share price to start accumulating shares. You certainly don’t want to pay premium prices when it’s facing two potentially major risks in the near term that could affect its long-term prospects.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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