RBLX - Roblox's Journey: Growth Innovation And Investor Considerations

2023-11-21 15:00:00 ET

Summary

• Roblox's Q3 2023 results showcase impressive revenue growth and a commitment to global expansion.
• Despite commendable efforts, uncertainty lingers about whether the current share price near $40 suggests a fully priced stock.
• The valuation at 57x forward EBITDA introduces a significant element of ambiguity in assessing Roblox's investment potential.

Investment Thesis

Roblox ( RBLX ) is an online platform that connects people of all ages worldwide, providing a dynamic environment for user-generated content, immersive 3D multiplayer experiences, and diverse engagement opportunities.

More specifically, Roblox delivered Q3 2023 results that reassured investors that this platform has what it takes to be a stable growth company.

That being said, I stand by the assertion that this stock is already fully priced and that it will be difficult for investors to be rewarded from its approximately $38 per share entry point.

Quick recap,

In my previous analysis , prior to its Q3 results, I said,

[The] uncertainty in growth rates places greater emphasis on Roblox's underlying profitability, which currently doesn't appear strong enough to justify its valuation.

My argument at the time was that I believed that its valuation was stretched for what it offers investors. Given that its share price is even higher today, I reaffirm my argument with more conviction, that this will be a difficult investment from this price point of close to $40 per share.

Roblox's Near-Term Prospects

Roblox's Q3 2023 results saw its revenues reach $713 million, reflecting a substantial 38% y/y growth in revenues.

During its Q3 earnings call , Roblox described its commitment to delivering growth as evident in its overarching strategy, which revolves around reimagining how people connect globally.

Notably, Roblox describes its growth strategy as encompassing diverse demographics and geographies, with significant growth in Japan, Germany, Brazil, and India, see below.

Moving on, the introduction of new devices like Meta Quest and Sony PlayStation aligns with the vision of making Roblox an omnipresent platform.

The platform's expansion is complemented by a focus on inclusivity, with growth in various age cohorts, underlining Roblox's status as a platform for users of all ages.

The next two graphics echo the declaration of Roblox's inclusive platform status.

On the left, you see a broad increase in users (you may have to click to zoom in), while on the right you can see that there's more to Roblox than under 13-year-olds.

On top of all that, Roblox asserts that advancements in advertising are expected to contribute to sustained revenue growth.

Given this background narrative, let's now discuss its financials.

Revenue Growth Rates Are Still Strong

During its earnings call, Roblox makes a whole song about the fact that it's not going to guide for Q4 2023, but that starting next calendar year, they'll provide detailed guidance for their annual and quarterly results.

Simply put, I believe that the rationale for not providing ''official'' guidance for Q4 and then providing it next quarter is an attempt to demonstrate that the business prospects have turned a corner and that the business is now more stable and predictable.

To put this more concretely, management wants to guide investors so that investors can be ''reassured'' that there will be few surprises along the way. Consequently, this strategy is an attempt to get the stock re-rated with a higher multiple, given that Roblox will be seen as a stable, secular growth story, one that be counted on for solid and consistent growth prospects.

RBLX Stock Valuation -- 57x Forward EBITDA

According to my estimates, Roblox will make about $320 million of EBITDA in 2023. If we presume that this EBITDA grows by approximately 30% in 2024, this would see Roblox's EBITDA reaching around $415 million in 2024.

Therefore, this stock is priced at 57x forward EBITDA. Yes, Roblox clearly has an alluring narrative, but having to pay such an exorbitant valuation is a tough bet to make.

Let me put it another way, at 57x forward EBITDA, it's difficult for one to make the case that there should be much of a multiple expansion. This means that if we presume that everything goes according to plan, investors could expect to see around 30% return, as the business' EBITDA grows by 30% in 2024.

But that assumption presumes that there isn't any further multiple contraction. And that's a tough assumption to make.

On the other hand, it is important to keep in mind that Roblox is very well-funded. The business holds a large cash position, meaning that it has more than sufficient resources to continue investing for further topline growth.

The Bottom Line

In wrapping up my assessment of Roblox, the platform's Q3 2023 achievements indeed impress, highlighting substantial revenue growth and a dedicated push for global expansion.

However, my initial stance remains, and the question looms larger at its current share price approaching $40 per share – is the stock potentially already fully priced?

The formidable valuation at 57x forward EBITDA, coupled with the enticing narrative, introduces an element of uncertainty. While Roblox's strategic vision and inventive strides warrant attention, the market's anticipation might have already factored in future successes.

Consequently, I remain on the sidelines.

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