RBLX - I Might Have Been Wrong About Roblox (Upgrade)

2023-12-05 14:39:55 ET

Summary

• Roblox Corporation has seen a reversal in its sales trend, with positive growth and increased user engagement.
• The company still faces profitability and free cash flow issues, losing money for each dollar generated in sales.
• The stock is classified as Hold due to positive sales trends, but concerns remain about profitability and cash flow.

In the last year, Roblox Corporation ( RBLX ) managed to turn its sales trend around, suggesting that my previous stock classification was too negative. The online gaming platform still has profitability and free cash flow issues, however, and it loses a substantial amount of money for each dollar generated in sales.

Roblox Corporation still has to optimize its expense structure in order to drive the platform toward profitability, but sales trends are positive, and the company had two positive free cash flow quarters in the last year. As a consequence, my new stock classification is Hold.

My Rating History

Due to concerning business trends, particularly falling platform sales in 3Q-22, my stock classification on Roblox Corporation was Sell .

My main concern with regard to Roblox Corporation was that the end of the pandemic would return people's lives to a state of normalcy, which in turn would translate into slower sales growth. This had proven to be true, but the gaming platform managed to reverse its sales trends.

Though the gaming platform still has to work through some issues, the path forward looks better than a year ago.

Sales Trend Has Reversed

Roblox Corporation's sales trend has reversed since I called the platform out more than a year ago. More users are using the Roblox gaming platform and, as a consequence, the gaming company has successfully engineered new sales momentum for its products, resulting in $713.2 million in total platform sales in the third quarter. This sales figure translates into 38% YoY growth, which was substantially supported by more users gravitating to the gaming platform.

The sales trend is primarily driven by user growth, not by users spending more money on the platform, which is, I think, an important distinction to make.

Roblox's user base included 70.2 million members at the end of 3Q-23, reflecting 19% YoY growth. With that being said, though, the average booking amount per daily active user has not moved up in lockstep with growth in accounts, suggesting that the platform is not managing to translate platform expansion momentum into higher sales per user.

Bookings, which consist of recognized and deferred revenues, amounted to $11.96 per user in the third quarter compared to just $11.94 per share in the third quarter, meaning the platform saw practically no growth in the last year.

The fourth quarter of each financial year traditionally results in a temporary uplift of Roblox's average booking per DAU, but I don't see a strong growth trend here, and most certainly none that correlates to underlying user growth.

As great as the sales trend is, Roblox Corporation continues to lose a lot of money for each dollar generated in sales. In the three months ending in September, the gaming company had $713.2 million in total sales, but it reported a steady $300.0 million in operating losses.

In short, for every dollar the company recognized in sales, it lost $0.42 (in operating losses) which is not a tenable situation. This compares, by the way, to 58 cents lost per dollar generated in sales last year. Though there is an improvement, the platform itself appears years away from profitability, which I would expect will ultimately also hold back the stock price.

Inconclusive Free Cash Flow Pattern

What I think might also hold back Roblox Corporation's stock potential is the fact that the free cash flow pattern is spotty and doesn't show clear trends, which creates additional uncertainty for investors.

Roblox Corporation, as the investor presentation chart shows, is not consistently profitable on a free cash flow level, with the company's free cash flow fluctuating between minus $96 million to positive $82 million in the last year.

Roblox was free cash flow positive in two of the last four quarters, which I guess is a positive takeaway, but the platform clearly struggles with consistency.

Strong Breakout Above The 200-Day Moving Average

Roblox Corporation has seen stock price momentum: RBLX broke out above the critical 50-day moving average line in October and above the 200-day moving average line after the gaming company reported 3Q-23 results.

In the short term, according to the Relative Strength Index, Roblox is at risk of being overbought and the chart picture as a whole has become a whole lot more bullish since August.

Issues And Risks I See With Roblox Corporation

The trends in sales and users are positive, the trends in average bookings and free cash flow not so much. Roblox Corporation is an industry leader and a well-known gaming destination and as such attracts new customers trying out the platform.

This doesn't change the fact, however, that Roblox falls short in the monetization department and continues to lose a lot of money, which poses obvious risks. If Roblox fails to improve platform profitability, then investors may lose their patience with the stock.

What Price Does One Have To Pay For Roblox?

The potential for growth, both in terms of sales and users, is there. Online gaming is booming and lots of companies make money in this market. Take-Two Interactive Software, Inc. ( TTWO ) and Activision Blizzard, Inc., which was swallowed up by Microsoft (MSFT), are two leading video game publishers.

Roblox Corporation is expected to see 18% sales growth next year and produce a total sales volume of $4.04 billion, whereas Take-Two Interactive Software is poised to take home nearly twice as much: $7.9 billion.

Since Roblox Corporation is not producing profits, a sales multiple is all that investors can use to value the company, while at the same time taking into account the platform's strong sales potential in the online video game market.

Based on a market value of $25.2 billion, the gaming platform is valued at 6.3x next year's sales, whereas Take-Two Interactive Software is selling for a 3.4x sales multiple. A major distinction between the two companies, besides differences in the product offering (Take-Two Interactive is a video game publisher whereas Roblox Corporation depends on a developer network to create game content) is that Take-Two Interactive is already profitable.

Since RBLX is not profitable and significantly more expensive than Take-Two Interactive but has favorable sales/user trends, my stock classification for the gaming platform is modified to Hold.

My Conclusion

Roblox Corporation has stronger sales trends than I expected, partially because consumers still spend a large amount of time on the Roblox platform, even after the pandemic ended. This engagement level and the overall growing popularity of online gaming have led to a reversal in the sales trend that I didn't see coming.

With that being said, there are still some major issues plaguing the online gaming platform, most noticeably the absence of real underlying profits and a spotty cash flow pattern.

Weighing the pros and cons against each other, I have come to the conclusion that Roblox Corporation's stock is best categorized with a Hold classification.

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