Roblox (NYSE:RBLX) faced several target-price cuts by bullish analysts on March 16. While that might seem bad for RBLX stock, the opposite is true.
Returning to more realistic engagement numbers is a good thing for future stock price movements. Here’s why.
RBLX Stock Must Earn Its Excessive Valuation
Since Roblox hit a 52-week and all-time high of $141.60 on Nov. 22, the online video game platform’s share price has lost two-thirds of its value. And, that’s with a recent three-day relief rally.
If you bought at the height of its share-price success and are still holding, the cuts by analysts bring investor expectations back to earth. With analysts expecting 2023 revenue of $3.66 billion, at its 52-week high, RBLX was valued at $76 billion [$141.60 multiplied by 536.4 million shares] or 21x sales.
That wouldn’t be out of line for a company making money. However, it lost almost $500 million in 2021. So its valuation needed a shakedown. To get back to 21x sales, Roblox will have to earn its way in the world.
That said, on a non-GAAP basis, it generated $558 million in free cash flow (FCF) in 2021 — a 29% FCF margin — 36% higher than in 2020. In addition, it finished 2021 with almost $1.8 billion in net cash on its balance sheet.
It ought to be able to absorb significant losses for a couple of more years. So while it’s understandable for investors to be concerned about some of the regression, the company can use this as a more accurate indicator of what needs to be done to keep business growing.
Until evidence shows a breakdown in its business model, I think it makes sense to remain patient and lower your expectations.
What Do the Numbers Really Say
Roblox’s daily active users (DAUs) were 55.1 million in February, 28% higher year-over-year, and basically flat to January with 54.7 million. So, yes, sequentially, it’s stalled. But as we’ve seen over the years with Netflix (NASDAQ:NFLX) and others, it can get unstuck in a hurry.
In that case, you want to own the stock before it gets unstuck, not after.
In February, the other perceived negative was the 2-4% YOY reduction in estimated bookings. In 2021, bookings increased by 45% to $2.7 billion. January saw bookings up 2-3% YOY. In November, its estimated bookings were between $208 million and $211 million, up 22-24% YOY.
Its estimated bookings in February were almost identical to its November numbers. It appears that the baseline for estimated bookings on a monthly basis in 2022 will be around $205 million. In 2021, they averaged $227 million per month [$2.76 billion in bookings divided by 12]. In 2020 they were $157 million, $58 million in 2019, and $42 million in 2018.
If you look at pg. 85 of its prospectus, you will see that even back in 2020, average bookings per DAU jumped around. From Q1 2019 through Q4 2020, this number was up in four quarters and down in four quarters.
So, to say that February’s numbers are predictive of poor key metrics in March is incorrect. But, just as past performance for stocks doesn’t guarantee future results, the same applies to Roblox.
Here’s what it said about the future in its Q4 2021 shareholder letter:
“Our focus will continue to be on building an amazing product with world class engineering. We have several key areas of product focus and we believe that if we stay laser focused on delivering those, as a byproduct, we will build a business that has the ability to compound its top line at high rates of growth for the foreseeable future.”
I couldn’t agree more.
The Bottom Line
The latest rally in RBLX stock is a good indication that the worst is over. If it stays focused, the booking numbers will move back to $220 million per month or higher. The current lull is just a plateau where it will momentarily sit until its next leg up. This is not the best the company or the stock has to offer.
Stay long, Roblox. Good things lie ahead.
On the date of publication, Will Ashworth 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
