Roblox (NYSE:RBLX), the online game and user developer platform company, recently provided very detailed guidance for the first and second quarters, and even the full year 2021. The net result is that RBLX stock already reflects lower guidance from the company — to the point where it actually looks undervalued now.
Many companies are not as specific with guidance as Roblox was on March 2 in its guidance release. The net result is that although revenue is expected to grow significantly, daily average usage will be lower. The same will happen with operating cash flow.
Guidance Provided by Roblox
The main takeaway for investors in the March 2 release is that while revenue for 2021 is forecast to be 56% to 64% higher, daily average usage will actually decline.
At the midpoint of guidance, daily active users (DAUs) will grow 9% to 35.5 million. They will be engaged for an average of 30,600 million hours during the year, at a growth rate of zero percent. Therefore, if we divide this amount of hours by the DAUs, the average user will be engaged 861.97 hours per year or 2.36 hours per day per DAU.
This is lower than the amount in 2020. There were 32.587 million DAUs who spent 30.601 million hours on Roblox. That works out to 2.74 hours per day per DAU. In other words, engagement will fall from 2.74 hours to 2.36 hours in 2021, or -13.8%.
However, due to price increases and growth in DAUs, the actual revenue will grow by 60% on average to $1.478 billion. Moreover, if it hits guidance the company will still be profitable and produce $330 million in operating cash flow. This is a respectable 22.2% margin, even though it is lower than last year’s 56.7% operating cash flow margin.
The bottom line is the growth will overcome lower usage of Roblox, and still feed higher revenue growth by 60%. That is the sign of a good business model. The company can always work on getting more engagement with its users, but as long as it continues to grow its DAU base, revenue will climb.
What Roblox is Worth
In my last article, I argued that Roblox has a very profitable business model. This was seen by the level of its free cash flow divided by its total bookings. That margin was high at over 21%.
Right now, RBLX stock has a market capitalization of $41 billion. This represents 27.7 times its 2021 forecast sales level of $1.478 billion. However, analysts now believe that Roblox will post a significantly higher revenue of $2.12 billion.
That implies that RBLX stock is much cheaper at just 19.3 times revenue (i.e. $41 billion / $2.12 billion). Next year’s revenue is forecast to be 25% higher at $2.66 billion. That puts RBLX stock on a forward multiple of just 15.4 times revenue. When compared to some of its peers, this seems quite cheap.
For example, Unity Software (NYSE:U), which operates a real-time 3D development platform, trades for 29 times 2021 revenue and 23 times 2022 revenue. This is 4.69% higher in 2021 than RBLX stock’s P/S multiple for 2021 and 88.3% higher for 2022. That works out to an average 46.5% higher multiple over both years.
Applying that higher valuation multiple (+46.5%) to RBLX stock, gives it a target price of $109.21 per share.
What To Do RBLX Stock
Roblox did a direct listing on March 10, when its stock closed at $69.50. As of Friday, April 30, RBLX stock was at $74.55, up 7.3% from March 10. Moreover, it peaked already at $82.05 on April 13.
Given its parity valuation with Unity stock is $109.21, I think there is still a good chance the stock could rise to that level. Once its earnings and revised guidance come out on May 10 for Q1 2021, look for RBLX stock to recover closer to my target price of $109.21, or 45% higher from here.
Even if it takes 2 years for that to happen, the average return is still 20.4% each year on a compound basis. For most investors, that is a very decent ROI.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.