Don’t Rush Into Roblox Stock Just Yet

I’m generally not a fan of jumping into stocks that have just gone public. And while Roblox (NYSE:RBLX) is different than most new issues, my broader rule applies for RBLX stock as well.

Roblox sign logo at headquarters
Source: Michael Vi / Shutterstock.com

Roblox went public in February — but not via the traditional initial public offering (IPO) route. Instead, the company executed a direct listing. In a direct listing, the company itself doesn’t sell shares. And insiders aren’t subject to the same “lockup” restrictions usually seen with IPOs.

Those lockup restrictions often add volatility to recent IPOs. They restrict supply since many shares can’t be sold. And they give traders a point to fix on: when the lockup expires, at which point a flood of supply threatens to push the price down.

RBLX stock doesn’t necessarily have those problems. But, so early in its history, it has its own. Here, too, I believe patience is advised.

Early Optimism

To be fair, the early optimism toward RBLX stock makes some sense.

This is a fascinating story. As Wall Street analysts have noted, Roblox combines the operating models of social media and gaming. Both industries have significant potential.

Roblox already is capitalizing on that potential. The platform’s adoption continues to expand. The number of average daily active users increased 85% year-over-year in 2020.

And those users are committed. In 2020, each spent (again, on average) 2.6 hours per day on the platform.

The economic fundamentals work too. Revenue increased 82% in 2020. Free cash flow was over $400 million.

Obviously, Roblox stock isn’t cheap. But these kinds of growth stories have done quite well in recent years. Bulls are betting that RBLX will be the next success.

The Pandemic Effect

But particularly with RBLX racing to the highs, I’m not quite convinced — for a couple of reasons.

The first is the impact of the novel coronavirus pandemic. Roblox had an excellent 2020, yes — but that shouldn’t be a surprise.

Most schools were closed, after all. And while many students undertook remote learning, most parents will tell you that they had far more free time — most of which was stuck indoors.

Let’s be fair. It’s not as if Roblox came out of nowhere. The company did show strong growth before the pandemic, including revenue growth of 56% in 2019.

And, of course, the growth in 2020 will help in 2021 and beyond. The 15 million DAUs added in 2020 aren’t going to simply disappear.

But a return to normalcy does provide a headwind. Engagement is going to moderate as students go back to school and schedules fill back up. The users acquired in 2020 won’t simply disappear, but some will have better things to do.

Growth is going to slow. In 2021, given the difficult comparisons, it’s likely to slow sharply. But if investors are seeing last year’s performance as a sign of what Roblox is capable of this year and beyond, they’re going to be disappointed.

And disappointment is not priced into RBLX stock.

Valuation and RBLX Stock

Relative to 2020 results, RBLX stock trades at a whopping 45x revenue. That’s one of the highest multiples in the market. And, again, it’s a multiple based on performance that was inflated by the pandemic.

The multiple on its own isn’t the issue. I’m more than happy to pay big near-term multiples for attractive long-term growth potential.

But the fact that the revenue multiple is based off abnormal, pandemic-driven results is a problem. It raises a short-term issue, as Roblox’s growth simply isn’t going to look nearly as impressive as 2021 rolls on. And it creates a long-term problem in that even strong performance from 2021 onward may well be priced in.

These concerns aren’t uncommon with new issues, whether direct listings or IPOs. The biggest bulls generally go rushing in once trading opens. Momentum traders come along for the ride.

But quite often, like with anything else, the sheen of being new starts to fade. And what’s left is a stock that often has very real valuation concerns.

I wouldn’t be surprised to see the same trend play out with RBLX stock.

That’s not to say that the stock is a short, or that it’s in a bubble.

Rather, there’s simply a lot of optimism here — and maybe too much optimism. As a result, long-term investors would do well to let the situation play out and see if normalcy presents a better price.

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now 


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