Why Roblox Stock Is Still a Buy As Its IPO Fever Dies Down

As one of the most hotly-anticipated initial public offerings (IPOs) of this year, Roblox (NYSE:RBLX) has provided more than just excitement to investors that were able to get in on the IPO. Indeed, early investors in RBLX stock saw a pop of more than 50% on its opening day. At the time of writing, shares remain elevated over 50% above the company’s initial listing price of $45 per share.

A child playing Roblox on a smartphone.

Source: Katya Rekina/ Shutterstock.com

Indeed, there’s a lot to consider with any IPO. Today, speculative investments in IPOs have brought about unusually high success rates for investors who get in early.

The question then is: can this momentum be maintained for investors in RBLX stock over the longer-term?

Here’s a bit on what the company does, and why there may indeed be room to be bullish on this stock right now.

Company’s Core Business Model Intriguing to Investors in RBLX Stock

Roblox’s core business is an intriguing one for sure.

The company offers a free online platform in which users can develop their own video games. Roblox’s suite of tools provided by Roblox Studio allow for this, and have become an integral (and intriguing) driver of user growth for this platform.

The company’s target market for its users is under the age of 13, and these games are often quite simplistic in nature. However, Roblox’s market isn’t small.

Indeed, according to the company’s most recent amended IPO Investment Prospectus, an average of more than 37 million users come to Roblox every day to connect with friends. Among these daily visitors, the company notes approximately 32.6 million are daily active users. Additionally, 8 million developers providing user-generated 3D digital worlds create an endless potential of new entertainment for its target market.

Additionally, the company’s revenue grew by 82% and daily active users jumped 85%, year-over-year. Growth has accelerated over time, and daily users appear to be sticky right now.

Now, that all sounds great.

However, the company is quick to note that it is losing money. Roblox booked a net loss of $253 million this past year, despite its aforementioned earnings growth acceleration. Indeed, the growth this company has been able to generate has come at a price. The company’s net loss has grown more than three-fold over the past year, despite falling during the 2018-2019 period.

That said, there is room for optimism with this stock. Here’s another key factor I think investors should focus in on.

Why Investors Are Getting Excited About RBLX Stock

In my view, Roblox’s story right now is really one about free cash flow growth.

Indeed, for high-growth names like RBLX stock, it’s generally accepted that growth won’t be profitable up front. Investors will need to be patient, and accept the idea that higher growth generally means less profit early on.

This is where taking a look at free cash flow growth comes into play. In the case of RBLX stock, the numbers look quite good.

According to its initial IPO prospectus, Roblox provided investors with $411 million in free cash flow this past year. That’s on revenues of only $924 million.

Additionally, this incredibly high free cash flow number in 2020 eclipses 2018 and 2019 performance. In those years, the company pulled in free cash flow of only $35 million and $15 million..

Why free cash flow is important here is because it represents a “truer” picture of the unit economics and operating leverage Roblox provides. Free cash flow is ultimately what will be reinvested in the future to provide growth. Accordingly, it’s a key lever investors need to assess when projecting out longer-term growth rates for RBLX stock.

Free cash flow also takes out the relatively high costs related to the company’s direct listing, which skew the profitability metrics downward. Accordingly, 2020’s GAAP operating loss numbers could be misleading to investors taking them at face value.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

Article printed from InvestorPlace Media, https://investorplace.com/2021/04/why-roblox-stock-is-still-a-buy-as-its-ipo-fever-dies-down/.

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