Gaming companies that witnessed a boom during the COVID-19 pandemic are facing a fall in demand as sky-high inflation has slowed the economy.

Moreover, according to The NPD Group's report, consumer spending on video gaming in the U.S. totaled $12.34 billion in the third quarter, a decline of 5% compared to the same period last year.

According to an AFP report, makers of consoles, accessories, and software for gaming are also experiencing lows due to steep inflation spurring and gaming fatigue after years of relying on indoor entertainment.

Given this backdrop, we think investors should steer clear of risky gaming stocks Roblox Corporation (RBLX) and Unity Software Inc. (U).

Roblox Corporation (RBLX)

RBLX is a developer and operator of an online entertainment platform. The company’s offerings include Roblox Studio, Roblox Client, Roblox Education, and Roblox Cloud.

In terms of its forward EV/EBIT, RBLX is currently trading at 75.56x, 804.7% higher than the industry average of 8.35x. Its forward Price/Cash multiple of 69.26 is 714.5% above the industry average of 8.50.

For the third quarter that ended September 30, RBLX’s total cost and expenses rose 39.4% year-over-year to $817.71 million. Its loss from operations rose 287.4% from its year-ago value to $300.01 million. The company’s net cash provided by operating activities declined 62.9% from the same period last year to $67.14 million.

Street expects RBLX’s EPS to come in at a negative $0.1.56 for the current fiscal year ended December 2022, indicating a decrease of 61.2% from the prior-year period. Its revenue for the current year is likely to be $2.80 billion. It has also failed to surpass its consensus EPS estimate in each of its trailing four quarters.

RBLX’s shares have declined 65.9% over the past year to close its last trading session at $36.74. It has a 24-month beta of 2.41.

RBLX’s POWR Ratings reflect this poor outlook. The company has an overall D rating, equating to Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

RBLX has an F grade for Stability and a D in Value, Momentum, Growth, Sentiment, and Quality. It is ranked last in the 21-stock Entertainment - Toys & Video Games industry.

To see additional details on RBLX, click here.

Unity Software Inc. (U)

U creates and operates an interactive real-time 3D content platform. Its platform provides software solutions to create, run, and monetize interactive, real-time 2D and 3D content for mobile phones, tablets, PCs, consoles, and augmented and virtual reality devices.

The company serves content creators and developers, artists, designers, engineers, and architects to create interactive and real-time 2D and 3D content.

In September, Applovin Corp (APP) withdrew its buyout offer for U. This followed U’s rejection of the $17.54 billion all-stock bid from AppLovin last month. U’s shares plunged on the news.

U’s forward Price/Sales multiple of 7.09 is 171.1% above the industry average of 2.62. In terms of its forward EV/Sales, the stock is currently trading at 7.18x, 160.2% higher than the industry average of 2.76x.

For the third quarter ended September 30, 2022, U’s total operating expenses rose by 28.9% year-over-year to $450.60 million. Its net loss increased 117.1% from the previous year's quarter to $ 250.02 million, while the company’s loss from operations grew 89.1% year-over-year to $239.63 million.

Its consensus EPS estimate of negative $0.34 for the current fiscal year ending December 2022 represents a decline of 56.1% year-over-year.

The stock has declined 83.5% over the past year to close the last trading session at $32.52. It has a 1.77 beta.

U’s bleak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of D, which translates to a Sell in our proprietary rating system.

The stock has an F Grade for Value and a D grade for Stability. It is ranked #20 in the same industry.

In addition to the above, we have also rated U for Growth, Momentum, Sentiment, and Quality. To see all POWR Ratings for U, click here.

RBLX shares were trading at $34.93 per share on Monday morning, down $1.81 (-4.93%). Year-to-date, RBLX has declined -66.14%, versus a -15.56% rise in the benchmark S&P 500 index during the same period.

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.

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