Yet another major company has come to market via direct listing. This time, on March 10, investors had a chance to get in on the Roblox Corporation (NYSE:RBLX) IPO. For those who didn’t pick up some RBLX stock on Day 1 at the offer price of $45 per share, that’s too bad. Shares now trade around the $75 level.
Initial expectations of the range RBLX stock could trade in was massive. Indeed, a $30-$120 range was identified via a poll prior to the IPO, setting the stage for some massive volatility.
Accordingly, it’s no surprise to many that the stock popped more than 60% on its first day. With a few peaks since then, RBLX stock has lost some momentum of late. It appears some profit-taking was in order, and a revaluation of the company’s valuation was likely due. Indeed, bond yields have been inching higher in recent weeks, so many richly valued growth stocks have understandably lost some elevation of late.
Today, shares remain more than 50% above the initial $45 target set. That’s some pretty decent appreciation over a one-month period, and early investors may indeed want to sit pretty holding onto those shares for the time being.
That said, I think it’s worth taking a look at where this stock could be headed from here.
The Key Question for RBLX Stock
What a year it’s been. Thinking back to March/April of last year, it’s amazing to think about the reality that it’s only been one year since the pandemic took hold.
I don’t know about you, but it’s felt like a decade for me.
However, this past year has been a transformative one in many ways, for different sectors. In particular, digital gaming has been one of the bright spots growth investors have flocked to. Pandemic-induced lockdowns and restrictions have provided some serious boredom for many folks. Reaching out to friends via an online community where one can interact virtually and develop their own alternative universe? Sounds good to me.
Indeed, Roblox’s platform is one that has seen a massive surge of interest during the pandemic. According to the company’s IPO prospectus, more than 37 million users frequent Roblox right now. That’s roughly equivalent to the whole population of Canada jumping on Roblox every day. Not bad.
However, whether or not this kind of user growth can be maintained moving forward is the question many investors have right now. Just as everyone’s flocking to their favorite reopening play, there’s a flip side to this trade. Companies that flourished during the pandemic could seemingly see some momentum lost when the masses stampede away from the TVs and toward the malls and movie theaters (as everyone seems to expect).
Thus, investors appear to be adjusting their growth inputs in their models today. Just how much of a hit Roblox will ultimately take post-pandemic remains to be seen. That said, the platform’s user base appears to be robust. Accordingly, if user numbers continue to inch higher in the quarters to come, there’s also the potential this stock could pop further.
Looking Ahead for Roblox
Indeed, I think Roblox is likely to be under the microscope in the coming quarters as investors gauge user growth. However, the top- and bottom-line numbers Roblox reports may be of even greater importance.
As I commented on in a recent piece, the company’s free cash flow growth was absolutely incredible last year. Roblox grew its free cash flow from a measly $35 million and $15 million in 2018 and 2019 to a whopping $411 million last year. This increase came as a result of the operating leverage Roblox’s business model provides. Its relatively large, fixed costs mean that more paying users results in higher margins and better cash flow performance.
It’s expected that the company will need to continue to invest heavily in its platform to support its growth. Therefore, it’s unlikely we’ll see bottom line earnings in the black anytime soon. However, investors will certainly expect to see some decent cash flow growth on the horizon.
I think the company’s business model and its current trajectory paint a pretty bullish picture for investors right now.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.
