RBLX - Roblox: Q3 Earnings Don't Be Fooled By Its Breathtaking Surge (Rating Downgrade)

2023-11-09 08:30:00 ET

Summary

• Roblox Corporation stock staged a remarkable rally after its third-quarter earnings release. However, earlier dip buyers could have sold on the surge.
• Q3's performance exceeded analysts' estimates, with bookings up nearly 20% YoY and robust DAU growth.
• Management stressed it's ready to provide guidance from FY24, improving investors' confidence in its sustainable growth.
• However, RBLX's "D-" valuation grade suggests much of its near- and medium-term upside has likely been priced in.
• Investors who missed buying RBLX at its September lows shouldn't be fooled into chasing its post-earnings rally.

I last covered Roblox Corporation ( RBLX ) stock for investors in early August 2023, highlighting why investors could consider a speculative opportunity into the leading "human co-experience" platform for online entertainment. That thesis didn't pan out initially, as Q2 results disappointed. However, RBLX has recovered above the buy levels indicated in my previous article over the past three months, powered by a surge after its recent third-quarter or FQ3 earnings results.

Despite the almost 12% spike yesterday, dip-buyers had started buying RBLX aggressively from its late September lows, as they correctly anticipated that the worst in RBLX is likely over. Roblox's Q3 performance and increasingly confident management commentary provided proof points to that thesis, although investors could also ask whether the optimism has been priced in.

Accordingly, Roblox outperformed analysts' estimates for Q3, as it delivered bookings of $839.5M, up nearly 20% YoY. While a downtick from Q2's 22% growth, it dispelled fears that Roblox could struggle to maintain a healthy growth cadence as it moves on from its unsustainable pandemic-driven craze.

Moreover, its DAU growth for Q3 remains robust, up 20% YoY but below Q2's 25% growth. Notably, engagement metrics have also not disappointed, as total hours of engagement increased 20% YoY. Roblox's ability to improve its monetization worldwide has demonstrated solid momentum.

For instance, Japan's DAU surged 66% YoY, as bookings increased 174%. In addition, India's DAU went up by 53% YoY, seeing bookings surge by 76%. In addition, Roblox has continued attracting more mature users, further boosting its ability to monetize, as DAU for users ages 25 and above increased 25%, including a 28% increase in total engagement hours.

Therefore, the optimism displayed by dip buyers who bought RBLX wasn't misplaced, corroborating Roblox's network effect moat as it works in improving operating leverage. In addition, management accentuated that it's ready to start providing financial guidance from FY24, helping to enhance investors' ability to model its performance. While the company didn't guide for Q4, management stressed that it's "comfortable with the consensus estimates for bookings and adjusted EBITDA."

Accordingly, Roblox indicated bookings estimates of $1.065B for Q4 are aligned with its expectations, suggesting an 18.4% uptick. The estimated adjusted EBITDA of $173.2M indicates a 5.4% downtick. Despite that, management indicated that CapEx spending is expected to trend down from 2024, given its substantial capacity upgrade implemented previously. As such, the company has confidence in continuing its ability to gain operating leverage as it continues to scale its platform.

In addition, it's optimizing its infrastructure costs further by leveraging on generative AI, allowing benefits to accrue from cost efficiencies derived from "applications in safety systems, moderation, real-time translation, search and discovery, and user-facing features like Roblox assistant." Furthermore, the company's ability to run inference in its data centers has helped to optimize its utilization further.

Roblox's readiness to provide quarterly and full-year guidance from 2024 is a significant milestone in its maturity as a platform business. It suggests that its global expansion strategy has given management enough confidence for its platform to be sustainable and higher monetization potential from older users as it continues to grow. As such, I believe RBLX is unlikely to revisit the lows it saw in September 2023. Notwithstanding my optimism, I explain why caution is necessary after a remarkable recovery from those lows.

Seeking Alpha Quant assigns RBLX a "D-" valuation grade, suggesting it's expensive. Its forward EBITDA multiple of 55.6x suggests much of its near- to medium-term growth potential could have been priced in.

In addition, RBLX's price action suggests caution is warranted, as dip buyers could look for opportunities to take profit. Also, I expect RBLX to struggle for upward momentum toward its July 2023 high of $47, which has proved to be a stubborn resistance zone since late 2022.

With RBLX still trying to regain its uptrend bias, investors shouldn't jump recklessly into yesterday's surge, allowing earlier buyers to cash out. Instead, I urge investors to wait for a steep pullback to assess the consolidation zone before committing more funds.

Rating: Downgraded to Hold.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

We Want To Hear From You

Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn’t? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!

For further details see: