It’s been three months since ARK Invest founder Catherine Wood opined that innovation stocks were not in a bubble. On the contrary, they “are in deep value territory.” Since this statement, Roblox (NYSE:RBLX) stock has corrected by 56% to current levels below $42. It indeed seems now that RBLX stock is in value territory.
At the same time, it’s worth noting that the markets are facing several headwinds. Geo-political tensions and inflation are likely to dominate the headlines. In these circumstances, there is a flow of funds from growth stocks to defensive stocks. Investors also seem to be buying precious metals.
The point I want to make here is that RBLX stock seems attractive after a deep correction. However, considering broad market conditions, I would look at buying in parts. My focus in this column is on the positive catalysts that could support a reversal rally.
RBLX Stock: Betta’ Than Meta?
Let’s first talk about the industry potential. In October 2021, the Tao Value newsletter talked about RBLX stock as a better metaverse play as compared to Meta (NASDAQ:FB).
Estimates suggest that the metaverse market was worth $107.1 billion in 2020. Further, the market size is expected to swell to $758.6 billion by 2026. Given the market potential, Roblox has headroom for aggressive growth in the coming years.
Company-Specific Growth Catalysts
If we look at the company’s financial statements as of Q4 2021, there are two factors that stand-out.
First, Roblox reported cash and equivalents of $3.0 billion as of December 2021. The financial flexibility provides headroom for aggressive investments and geographical expansion.
Further, Roblox reported free cash flow of $411.2 million in 2020. In the current year, the company’s FCF increased to $558 million. Considering the growth trajectory, the company seems positioned to deliver FCF in excess of $1.0 billion in the next two to three years. The business has therefore demonstrated the potential to generate cash, which ultimately impacts the valuation.
Skillz (NYSE:SKLZ) stock has slumped by nearly 80% in the last six months. A key reason is muted growth in monthly active users. Even as the company ramps-up sales and marketing expenses.
For Roblox, growth in daily active users (DAU) has been healthy on a sustained basis. For Q4 2021, the company reported 49.5 million DAUs, some 33% higher on a year-on-year basis.
Another point to note is that the company’s DAU in U.S. and Canada declined marginally in Q4 2021. This was more than offset by healthy metric growth in APAC, Europe and the rest of the world. With global presence, Roblox has a big addressable market.
There is another positive metric, which points to the fact that Roblox has been a success in terms of retaining users. For Q4 2021, the company reported an all-time high average monthly unique payer.
For the same period, the average monthly repurchase rate was the highest ever for the company at 89%. Clearly, paying users have been coming back to use the platform again. This is positive from a long-term cash flow perspective.
Concluding Views
Roblox has not been providing quarterly guidance. However, the company believe that the trend in the first month of 2022 is indicative of the overall growth potential. For January 2022, Roblox reported 54.7 million DAUs. On a year-on-year basis, DAU accelerated by 32%.
Further, revenue growth for the month (YoY) is in the range of 64% to 66%. This is an indicator of the point that Roblox is well positioned to deliver healthy numbers through 2022.
For the last financial year, Roblox reported revenue of $1.9 billion. At a valuation of $24.2 billion, Roblox is trading at 12.7 times sales. Valuations seems reasonable considering the point that growth has been robust and cash flows have continued to improve.
My view on valuation is underscored by the point that 12 analysts have a median 12-month price forecast of $74.5 for the stock. The most bearish among them has a price forecast of $45. Clearly, the selling seems to be overdone with the stock trading at $41.8.
Overall, I remain bullish on the Roblox growth story. As metaverse expands, the company is positioned to benefit. Considering the population, there is ample scope for growth in emerging markets.
On the date of publication, Faisal Humayun 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.
