Is Roblox a Buy ahead of First-Quarter 2022 Earnings?


RBLX stock - Is Roblox a Buy ahead of First-Quarter 2022 Earnings?

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Roblox (NYSE:RBLX) stock has lost almost 70% from its high of $134.72 in November 2021. The key reason has been a drop in active user engagement on its platform. Investors are concerned about the company’s growth prospects in a post-pandemic scenario.

During the pandemic, daily active users (DAUs) surged from 23.6 million in Q1 2020 to 49.5 million users in Q4 2021, reflecting a compounded annual growth rate of 44.8%.

However, this growth rate seems unsustainable going forward as outdoor activity increases. A majority of the company’s user base comprises kids below 13 years old. The easing of pandemic restrictions, reopening of numerous stores and restaurants, and the full return to school will likely cut into this growth.

For 2022, revenues are expected to be in the range of $203 million to $207 million per month. Using an estimated revenue run rate of $200 million per month, the full year forecast is $2.4 billion. This implies a growth rate of 26% from 2021.

Another, positive factor is its ability to generate positive free cash flow. In 2021, the company recorded a free cash flow margin of 29.4%, which is healthy. Higher cash flows would allow Roblox to carry out expansion plans.

Roblox is generally lumped into the emerging Metaverse trend, a world of connected software that allows people to interact 100% virtually with one another, often in the form of video games and new technology such as virtual reality. The concept of the metaverse is new and it will take time before its largely adopted.

Increasingly, companies are engaging in virtual events to keep its users connected. Some of the notable examples include the launch of Chipotle (NYSE:CMG) Burrito Builder on Roblox. A player on Roblox must roll burritos in the metaverse to earn burrito bucks, which can be used on the Chipotle app.

Other agreements include the National Football League (NFL) holding large virtual events online and Warner Music hosting a virtual DJ party. Cathie Wood’s Ark Investment Management certainly believes in Roblox’s potential, having recently doubled its investment in RBLX to 5.48 million shares.

The Metaverse market is predicted to reach over $670 billion by 2030, from about $39 billion in 2020. Roblox, being a pioneer, will stand to benefit. RBLX stock is worth considering right now after such a prolonged selloff.

On the date of publication, Sakshi Agarwalla 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 Publishing Guidelines.

Sakshi Agarwalla has more than eight years of experience writing equity research reports and preparing financial models for companies across various industries, as well as writing newsletters and financial articles. Recently, she assisted her Fund manager in executing trades, preparing weekly, monthly NAVs and writing newsletters. She has a postgraduate degree in finance and has completed CFA.

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