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Roblox: Do You Like The Business Or Not?

Published 08/17/2022, 09:52 AM
Updated 07/09/2023, 06:31 AM
  • Valuing RBLX stock is no easy task given significant uncertainties surrounding the business now
  • After a rally, stock isn’t cheap — but the valuation is reasonable as long as growth continues
  • From a broad standpoint RBLX is a straight bet on whether the company will deliver on its promise

What is Roblox (NYSE:RBLX) stock worth?

The true answer is that no one really knows.

After all, valuing any growth stock is difficult. Fundamental analysis requires trying to estimate growth years into the future. It’s an impossible task. All any investor can do is make as educated a guess as possible.

But even by those standards, RBLX stands out. There are two core uncertainties here.

Over the past few months, investors have veered wildly in predicting how those uncertainties will play out. In November, RBLX touched $140, giving the market capitalization of $70 billion. By May, the stock had fallen more than 80% from the highs. It’s since more than doubled.

Roblox Weekly Chart

Source: Investing.com

In the context of the story, the volatility makes some sense. But after that roller-coaster, the RBLX story looking forward is somewhat simple. If the business works, the stock will, too.

The Uncertainties Facing Roblox

The first is the impact of the novel coronavirus pandemic. School closures, no doubt, boosted the platform’s usage. Indeed, per Roblox’s Form S-1 filed ahead of its 2021 initial public offering, daily active users in 2020 averaged 2.6 hours on the platform. The number of DAUs nearly doubled.

But with normalcy returning, the tailwind has faded. DAUs rose 40% in 2021, per the Form 10-K. But the increase came largely from the platform’s overseas expansion. In the more mature U.S. and Canada market, DAU growth has stalled out:

Roblox Daily Active Users

Source: Roblox 10-Q

The same is true of bookings, which account for the actual cash spent on the platform in a quarter, rather than the revenue recognized during the period. Here are the bookings per daily active user:

Roblox Average Bookings Per Daily Active User

Source: Roblox 10-Q

The number of hours users are engaged, too, has headed back toward pre-pandemic levels.

The second question surrounds the durability of the platform. Roblox has exploded in popularity in recent years, but it’s not a new company: Roblox was founded in 2004. Bears toward RBLX stock — and more than 7% of the float still is sold short — have argued that the platform’s popularity is likely to reverse.

After all, Roblox’s core customer is under the age of 13. In fact, according to the 10-Q, 47% of daily active users in the first half of 2022 were under the age of 13. And children’s tastes are notoriously fickle.

Of course, that also means more than half of users are either 13 or older. Roblox has made a concerted effort to target those older potential customers, and with some success: in 2020, 54% of daily active users were under 13.

The Case Against RBLX

Both uncertainties underpin a seemingly logical bear case for the stock. After all, RBLX still is pricing in substantial growth.

At $48, Roblox has an enterprise value just shy of $26 billion. Bookings over the past four quarters have totaled $2.7 billion. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) over that period came in at just over $400 million, and free cash flow at roughly $300 million.

So RBLX is trading at almost 10x bookings, more than 60x EBITDA and 85x free cash flow. Yet, its growth has stalled out. In the first half of the year, though revenue growth has been strong, bookings have actually declined 4%. Both EBITDA and free cash flow have declined sharply, owing to higher fees to developers and increased employee expense.

Those year-to-date results support the argument that Roblox simply was a “pandemic winner.” And like so many pandemic winners — think Snap (NYSE:SNAP) or Peloton Interactive (NASDAQ:PTON) — the return to normalcy has meant the end of growth.

And that doesn’t even account for the fad risk. The focus on older age groups is working to some extent. Yet, that success hasn’t done anything to boost consolidated growth. And without growth, RBLX has significant downside ahead.

The Case For The Long View

All that said, there were reasons why investors bid RBLX up to $140. And it wasn’t just based on the company successfully monetizing users in the U.S. and Canada under the age of 13.

There are huge long-term potential tailwinds here. While Facebook owner Meta Platforms (NASDAQ:META) invests billions of dollars in the “metaverse,” Roblox already has a metaverse. As an analyst argued last year, the opportunities in areas like music and education are huge.

Meanwhile, even stalled-out performance against 2020 levels is hardly a disappointment. DAUs in 2019 (again, per the S-1) were 17.6 million; the figure has nearly tripled in less than three years. Bookings that year were just shy of $700 million; they’re now four times as high. Unsurprisingly, nearly every video game company has struggled this year, with Roblox actually having done better than most.

And, in the near term, there are potential growth drivers. The international opportunity is one in particular. Advertising is another, with Roblox launching its “immersive advertising” experience later this year. Those ad revenues will drop to the bottom line at high margins, driving earnings and free cash flow higher in a hurry.

At the least, it’s too early to write off Roblox stock, or to see the first-half performance as the beginning of the end of its growth. Investors can still see a company poised to transform online life worldwide — and a stock with much more upside ahead.

Disclaimer: As of this writing, Vince Martin has no positions in any securities mentioned.

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