Flashback to 14 months ago and Roblox (NYSE:RBLX) was valued at about $4 billion. Today, with the RBLX stock price at $69, the company has a market capitalization nine times as high.
Those two facts alone underscore the potential skepticism toward RBLX stock since its initial public offering last month. Yes, there’s an intriguing story here. But valuation looks stretched. And there’s an obvious risk that usage will decline as the world returns to normal following the novel coronavirus pandemic.
Neither risk should be ignored. RBLX stock is pricing in a good amount of growth. And it’s fair to have some concern about what performance looks like in 2021 — and beyond. But the reason why a $36 billion valuation makes sense, and might even be cheap, is that Roblox is just scratching the surface of its potential. And in recent years we’ve seen plenty of similar stories defy valuation concerns and provide significant returns. RBLX stock may well be next in line.
Where Roblox is Now
In 2020, Roblox averaged 32.6 million daily active users, according to its Form S-1/A filed with the U.S. Securities and Exchange Commission. Each user averaged roughly 2.6 hours on the platform. That’s impressive reach and engagement. Both figures grew sharply in 2020, with DAUs up 85% from 2019 and average daily engagement rising by roughly half an hour.
Roblox’s growth last year was just as impressive. Revenue rose 82% to $924 million. But bookings — essentially the cash paid by users, not all of which is immediately recognized as revenue — soared 171% to $1.9 billion. Earnings don’t look particularly impressive — but, again, not all of 2020’s cash was recognized as revenue. So while Roblox posted a loss for the year, it generated over $400 million in free cash flow. That’s largely why the company chose a direct listing of RBLX stock, rather than selling shares in the IPO: it didn’t need to raise capital.
Simply looking at 2020, it’s relatively obvious why there’s been so much optimism toward RBLX stock. Growth is impressive, the company is generating positive cash flow, and the opportunity is large. The question at $69 is whether that’s enough.
Concerns About Valuation
One obvious concern for RBLX stock is the valuation. Even with impressive performance last year, Roblox shares still trade at nearly 90x free cash flow, and almost 20x bookings. That aside, the business seems to have two key risks. The first is that 2020 performance was impressive — but unsustainable. Obviously, the pandemic played a key role here. Over half of DAUs are under 13 years old. School closures in particular no doubt helped spike 2020 results.
The worry, then, is what happens when normalcy returns. Indeed, we’ve seen shares of other “pandemic winners” pull back amid the recovery, with Zoom Video Communications (NASDAQ:ZM) a notable example. Still, it’s not like Roblox came out of nowhere over night. In 2019, the company still generated revenue growth of 56% and a bookings increase of 39%.
Free cash flow, too, was positive (though far more modest at just $15 million). Even though the valuation assigned to the business has soared, there was still an attractive profile before the pandemic.
The second risk is broader: that Roblox is a bit faddish. The platform has been around since 2004, but growth has accelerated of late. And it’s come, again, from a mostly under age-13 demographic. That’s a demographic whose tastes change over time.
As current users age out, Roblox needs new users to replace them. If those users find another online outlet — or simply are busy with other activities — DAUs begin to fall, and eventually revenue does the same. RBLX stock is not at all priced for that scenario.
The Case for RBLX Stock
The risks can’t be ignored. But neither can be the potential. Roblox simply has so much potential for growth. It can expand its demographic reach to the 13-18 age group, as well as adults. Advertising bookings are “minimal,” per the S-1/A filing, but Roblox plans to build out that revenue stream. Some 69% of revenue comes from the U.S. and Canada, leaving a substantial opportunity for international expansion. That includes a strategic partnership with Tencent Music Entertainment (NYSE:TME) in China.
More importantly, there’s still so much more that Roblox can be. It’s a hybrid social-gaming platform, which provides what the company calls “human co-experience.” Could companies host virtual meetings on the platform — or virtual tours of their properties? Could museums build 3-D models of historical sites? What other myriad use cases will the thousands of developers find? Aspects of the RBLX case echo those of other big growth winners in recent years.
Roku (NASDAQ:ROKU), too, has seen optimism toward expansion of its platform beyond its legacy device business. It’s still not clear exactly what Roku will look like in a few years, but the potential has created massive returns in ROKU stock. The advertising opportunity echoes that facing Amazon (NASDAQ:AMZN) a few years back.
International expansion and per-user revenue increases have underpinned the huge rally in Snap (NYSE:SNAP). The case for RBLX stock is much like those growth winners. If the company can post a strong 2021 and dispel worries about the pandemic boost, it will be the next one.
On the date of publication, Vince Martin held a long position in AMZN.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.