Last month I wrote that Roblox (NASDAQ:RBLX) is worth $201 per share, or over double its July 2 closing price of $86.20. This was based on my forecast of its 2022 free cash flow (FCF) which I estimated would be $1.1174 billion. And using a 1% FCF yield metric, I wrote that the target value for RBLX stock would be $111.74 billion, or 127% over its recent $49.12 billion market value.
I now think that there is evidence that RBLX should rise at least 20% from here, even if we use a more conservative valuation approach. Let me explain.
Remember that the FCF yield metric we use to value RBLX stock is 1%. I now believe that even if we use a much more conservative figure of 2%, the value of RBLX stock is still 19.5% higher. Here is how that works.
Valuing Roblox Stock
My estimate last month that RBLX will produce $1.1174 billion in FCF was based on its historical 37% FCF margin from Q1. In addition, analysts reported by Seeking Alpha forecast at the time that 2022 sales would be $3.02 billion, which means FCF would be $1.1174 billion (37% x $3.02 billion).
But now analysts have raised their 2022 sales estimates to $3.17 billion. Therefore, my new estimate for 2022 FCF should be $1.1736 billion. This is slightly higher than my previous FCF estimate.
But I got to thinking. What if the market did not use a 1% FCF yield to value RBLX stock? Using a 2% FCF yield metric lowers the valuation estimate. If we divide the $1.1736 billion FCF estimate for 2022 by 2%, the result is a lower target value of $58.682 billion.
But this is still significantly higher the market capitalization. For example, dividing $58.682 billion by the $49.12 billion market cap implies a potential gain of 19.5%. This results from the higher sales estimate and the much lower valuation metric (i.e., a 2% FCF yield produces a lower value than a 1% FCF yield).
This also implies that RBLX stock is worth at least $103 per share. This is seen by multiplying the price on July 2 of $86.20 by 119.5%.
Where This Leaves RBLX Stock
Some analysts tend to agree with my new assessment of RBLX stock. For example, TipRanks.com reports that six analysts have an average price target of $88.57. This is lower than my $103 price target but still higher than today’s price.
In addition, Seeking Alpha reports that six analysts have an average target price of $91.17 per share. That is also higher than the July 2 price by 5.8%. This is still not as high as my 19.5% potential price gain but represents their view that RBLX stock is still undervalued.
My view is that Roblox will likely produce stellar results, albeit potentially lower than last year and last quarter. The primary target audience of Roblox, kids, spent much of the last year (and the last quarter) stuck inside due to lockdown restrictions across the U.S.
Nevertheless, the company produces huge amounts of free cash flow. This means its FCF margins will likely stay very high. This could lower RBLX stock for the time being but also provide investors an opportunity to average cost into their holdings.
RBLX stock is likely to rise at least 20% higher to $103 by 2022 as investors realize that sales and FCF will continue to grow. If the markets put a higher value on RBLX than a 2% FCF yield (such as the 1% FCF yield I wrote last month), it could move significantly higher.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.