Buy Roblox Stock For Its Serious Long-Term Growth Potential

 Roblox Corporation’s (NYSE:RBLX) strong quarterly report is a defining moment for the game maker. Not only is RBLX stock one of the few strong performers after its initial public offering (IPO) but the fundamentals are more solid than markets thought.

Roblox sign logo at headquarters

Source: Michael Vi / Shutterstock.com

Roblox shows signs of catching up or exceeding Activision (NASDAQ:ATVI) or Electronic Arts (NASDAQ:EA), respectively, on a market capitalization comparison. It does not rely on blockbuster game titles like EA and Activision. Most importantly, its user base is growing at a strong pace.

First Quarter Strength Supports Upside in RBLX Stock

Roblox posted first-quarter GAAP earnings per share of negative 46 cents. Bookings rose by 161% Y/Y to $652.3 million. The company’s year-over-year growth is exceptionally strong. Furthermore, the daily active user growth Y/Y is exceptional, at 42.1 million in Q1/2021 (refer to slide 19 here). Bookings remain elevated at $652.3 million, although Y/Y growth slowed compared to the last three quarters. Still, Roblox has only modest personnel cost growth. Conversely, developer exchange fees are still growing. This will pay off. The better the product gets, the more DAUs will grow.

In the gaming space, user growth matters more than profits in the near term. The company needs to foster its ecosystem, capturing growth globally and attracting users across all major age groups. For example, the U13 (under 13) category is growing very well. This audience will offer strong recurring revenue over the next several quarters.

Hours of engagement are still rising. Growth slowed slightly, up 98% Y/Y. Growth peaked in Q1/2020, up 164% Y/Y. As long as the average bookings per DAU are in the double digits (at $15.48 in Q1), investors should stay content.

Buying Opportunity

Roblox’s IPO gives the company the capital it needs to grow the business. It continues to expand geographically. Its user base benefits from the age demographic. Chief Financial Officer Michael Guthrie said on the conference call that the company is nowhere near “close to being done” on growing geographically and by age demographic.

Despite trading at a price-to-sales of around 44 times, RBLX shares are growth investments whose revenue will keep growing. For example, Roblox still has to increase its growth in North America, Europe and the United Kingdom. The strong management team suggests that the company will not miss expectations.

In China, Roblox is in the early phases of breaking out on growth. It has a strong, young, and talented developer community in the region.

RBLX Stock: Fair Value

Roblox does not score that well overall or on growth. Still, it has a strong valuation rating score:

Roblox scores well on value.

<em><a href="https://www.stockrover.com/plans/free/?sa_author=diy_value_investing">Chart courtesy of Stock Rover</a></em>

As Roblox reports strong revenue growth, expect the growth score to rise from here. Unfortunately, the seven analysts who rate the stock as a “buy” have an $85 price target (per Tipranks). This suggests that the stock is already trading at close to fair value.

In the five-year discounted cash flow EBITDA model above, RBLX shares have a fair value of around $80.

Metrics Range Conclusion
Discount Rate 7.5% – 6.5% 7.00%
Terminal EBITDA Multiple 20.7x – 22.7x 21.7x
Fair Value $74.24 – $83.18 $78.63

Model courtesy of finbox

The model uses an EBITDA Exit multiple to calculate Terminal Value after five years.

Readers may bookmark the link above or open it to change the assumptions.

Fiscal Years Ending 20-Dec 21-Dec 22-Dec 23-Dec 24-Dec 25-Dec
Revenue 924 1,478 2,291 3,437 4,983 5,731
% Growth 81.70% 60.00% 55.00% 50.00% 45.00% 15.00%
EBITDA -222 693 802 1,547 2,193 2,292
% of Revenue -24.10% 46.90% 35.00% 45.00% 44.00% 40.00%

Model courtesy of finbox

Above are the revenue projections over the next five years. Assume strong growth this year and next, followed by a slight decline. Value investors should wait for another potential dip in the stock, to capture a bigger margin of safety. Growth investors should continue accumulating the stock and holding it for the next few years. Roblox is in the early innings of major growth, thanks to its thriving developer community and user base.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.


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