2024-01-09 10:42:17 ET
Summary
- With RBLX already available on multiple AR/ VR/XR platforms, it is unsurprising that we have seen growing DAUs, bookings, and deferred revenues, based on the increasing lifetime installs.
- The management has also attempted to rebrand the platform as a social media platform, based on the strategic introductions of new APIs, avatar, and communication tool updates.
- We maintain our stance that the RBLX stock is overvalued here and is likely to remain so going forward.
- The management's focus on delivering high growth implies an inability to generate positive net income profitability as well.
- With the stock market greed index increasingly elevated due to the supposed soft landing, we believe that there may be a moderate pullback in the overall stock market, with RBLX likely to be affected.
We previously covered Roblox Corporation (RBLX) in September 2023, discussing its bright prospects as one of the long-term Metaverse winners, attributed to the aggressive growth efforts across different platforms and partnerships.
Despite so, we maintained our Hold rating then, since the stock had also pulled forward most of its upside potential, with its inflated valuations offering investors a minimal margin of safety.
In this article, we shall discuss why RBLX remains a speculative stock, with the management's focus on delivering high growth implying its inability to generate positive net income profitability.
Despite the gaining traction and the injection of optimism from the management, we maintain our stance that the stock is overvalued here and is likely to be overvalued moving forward.
In the intermediate-term, we believe that the RBLX stock may continue to trade sideways, with it only suitable for swing traders with higher risk tolerances.
The RBLX Investment Thesis Has Improved - Though Still Overly Inflated
Most recently, RBLX has reported a double beat on their FQ3'23 earnings call , with bookings of $839.45M ( +7.5% QoQ / +19.6% YoY ) and GAAP EPS of -$0.45 (+2.1% QoQ/ +10.2% YoY).
The growth in its bookings is impressive indeed, attributed to the expansion in its Average Daily Active Users [DAU] to 70.2M (+4.7M QoQ/ +11.4M YoY), stable Average Bookings per DAU of $11.96 (inline QoQ/ YoY), and growing Hours Engaged at 16B (+2B QoQ/ +2.6B YoY).
These numbers indicate its ability to attract new users while growing the stickiness of its offerings, providing further tailwinds to its top line growth.
This is also observed in RBLX's expanding gross profit margins of 22.4% (+3.6 points QoQ/ +13 points YoY), implying its improved scale of operations and stabling Developer Exchange Fees.
With an estimated paying user life of 28 months and deferred revenues of $2.2B (+4.2% QoQ/ +25.7% YoY), it appears that the company's top line is secure in the near-term.
RBLX's Hours Engaged by Region and Age
On the one hand, these tailwinds have been negated by RBLX's accelerating adj operating expenses of $239.98M (+4.5% QoQ/ +28% YoY) by the latest quarter, after adjusting for its non-cash stock-based compensations.
This is on top of the sustained share dilution to 619.35M in share count (+6.66M QoQ/ +21.57M YoY), with its shareholders' equity consistently eroded thus far.
Therefore, while the management has been able to grow its audience globally while aging them up, with 56.9% (+0.8 points QoQ/ +2.7 YoY) now over 13 years of age, it is apparent that the focus for growth has impacted its ability to generate net income profitability anytime soon.
On the other hand, RBLX has been able to record $81.06M in adj EBITDA (+113.9% QoQ/ +59.3% YoY) and $59.51M in Free Cash Flow profitability in FQ3'23 (+172.1% QoQ/ +189.9% YoY), partly attributed to the management's optimized capex of $53.2M (-52% QoQ/ -60.1% YoY).
This has directly contributed to the QoQ improvement in its balance sheet, with the cash/ short-term investments of $2.15B (+1.8% QoQ/ -28.8% YoY) likely implying its ability to grow without having to rely on expensive/ dilutive capital raises ahead.
In addition, the RBLX management has somewhat confirmed the FY2024 booking value of $4.03B (+18.8% YoY) and adj EBITDA estimates of $489.9M (+36.1% YoY), with the FCF generation likely to be boosted by the much lower projected capex of $100M (-68% YoY).
This is on top of the long-term target of "annual bookings growth of over +20% and growing margins by 100-300 basis points per year over the next 3-5 years," suggesting its ability to sustain its high growth trend.
Lastly, readers must not forget RBLX's massive tailwinds arising from the growing Metaverse market size from $50.54B in 2021 to $626.65B in 2030, expanding at an accelerated CAGR of +45.2%.
More Big Tech companies are increasingly invested in the AR/ VR/ XR headsets as well, with Apple's ( AAPL ) Vision Pro headsets to be launched over the next few months, directly competing with Meta's ( META ) Quest 3/ Pro headsets .
Even Qualcomm (QCOM) has hinted that Samsung (SSNLF) and Google (GOOG) (GOOGL) are already working on their next-gen versions of spatial computing platform, with a number of Chinese-based companies following in their footsteps, including Xiaomi's launch in early 2023 and Huawei's by the end of 2024.
With RBLX already available on Meta Quest, Sony (SONY) PlayStation, and Microsoft's ( MSFT ) Xbox, it is unsurprising that we have seen growing DAUs, bookings, and deferred revenues as discussed above, based on the increasing lifetime installs of over 17M from these platforms.
The management has also attempted to rebrand the platform as a social media platform, based on the strategic introductions of new APIs and avatar updates. These allow the users to customize their personal on-site experience while embedding communication capabilities in mobile phones, with a plan to include " any other devices " in the far future.
The Consensus Forward Estimates
These efforts indicate the RBLX management's focus on delivering growth across different age groups, geographical locations, use cases, and platforms have negated its ability to generate break even and/ or positive net income profitability for the " foreseeable future. "
Despite the projected positive Free Cash Flow generation from FQ4'23 onwards, we believe that much of the cash is likely to be used to fund its growth opportunities with near zero possibilities of dividend payouts, as the stock's prospects are only tied to its potential capital appreciation.
RBLX Valuations
However, with RBLX's FWD EV/ Revenues valuation of 6.74x and FWD Market Cap/ Free Cash Flow valuation of 364.63x already elevated, compared to the recent bottom of 5.12x/ 103.68x and sector median of 2.55x/ 19.31x, we are uncertain if there is any upside prospects at current levels.
These numbers are reminiscent of the bloated valuation levels observed during the hyper-pandemic heights, with any top-line misses likely to bring forth painful corrections ahead.
So, Is RBLX Stock A Buy , Sell, or Hold?
RBLX 1Y Stock Price
Combined with RBLX's sideways movement since February 2022 and the short interest of 4.48% at the time of writing, it appears that the stock is more likely to be a swing trade candidate ahead. This is between the 2022/ 2023 support levels of $26s and Q4'22/ 2023 resistance levels of $46s.
While swing trades can be highly profitable, we also believe that the potential volatility implies the stock may not be suitable for readers whom are looking for a stable long-term investment thesis.
Therefore, while we are highly optimistic about the potentials of the next-gen spatial computing platform and Metaverse, it appears that RBLX's high growth prospects remain speculative for so long that it is unprofitable on an operating income and adj EPS basis.
Investors looking to add here must proceed with caution indeed. Despite the gaining traction and the injection of optimism from the management, we maintain our stance that the stock is overvalued here and is likely to be overvalued moving forward.
For context, readers must also note that part of the recent rally is attributed to the cooling inflation and the increased likelihood of a Fed pivot in Q1'24, with the SPY similarly up by +13.9% since the October 2023 bottom.
With the stock market greed index increasingly elevated due to the supposed soft landing, we believe that there may be a moderate pullback in the overall stock market, with RBLX likely to be affected as well.
As a result of the potential capital losses, we prefer to maintain our Hold (Neutral) rating here.
For further details see:
Roblox: Will Mixed Reality Headsets Revive Its Growth?