Is Roblox A Buy?

Shares of entertainment platform Roblox (RBLX) have fallen 65% from its 52-week highs. It trades below its initial opening price of $64.50 back in March of 2021.

There are plenty of rumblings around the metaverse and its potential. This begs the question on whether RBLX has pulled back far enough to make for an interesting investment?

The human co-experience, better known as the metaverse, is a massive category that is still in early development. It will continue to grow and evolve in the coming decades. 

Roblox is viewed as one of the leaders in the emerging “Metaverse” category. Its vision is to connect one billion people with optimism and civility by reimagining the way people come together. 

Brands will be an important economic contributor to the metaverse but, for now, RBLX is letting the market develop organically while it pays close attention. The company has announced partnerships with some heavy hitters including the NFL, Nike (NKE), Gucci, Vans and Zara Larsson. RBLX’s vision is that immersive 3D interaction will ultimately represent an amazing way for fans to connect with brands. 

Looking at RBLX’s Q4 earnings, we see revenue increased a healthy 83% y/y. Revenue for the full year was $1.91 billion, an increase of 108% y/y. Cost of revenue was in line with this growth, increasing 107% y/y to %496.9 million. 

Daily active users reached 49.5 million in Q4, an increase of 33% y/y. This was shy of the 50 million expected by the street.

The January user growth in the 17 through 24 category grew 51% y/y. This demographic comprised 20% of all DAUs in January, making it a meaningful segment for the company. This is important for RBLX as it believes growth in established area like the U.S. and U.K. will be driven by older users. RBLX already has a huge user base in the Under 9 and 9-12 age groups. Its growth in the 13-16 and 17-24 age groups are its primary concern as the net wealth of this group starts to increase. 

International has also been a key area of growth. Asia Pacific, Latin America, and Europe have all picked up in adoption. Japan and India both grew over 100% y/y.

Hours engaged was 10.8 billion, up 28% y/y but short of the 11.2 billion expected. RBLX noted that it is not unusual for there to be a decline in Q4. Q3 holds key summer months July and August. Participation generally slows with back-to-school in September. It remains quiet in October and November before picking back up around the December holidays. The return to in-person school and work have added to these difficult comps.

Roblox’ Q4 bookings for the fourth quarter rose 20% y/y to $770 million. This was shy of analyst expectations of $786 million. Bookings are driven primarily by the United States and United Kingdom. RBLX noted that both the opening of COVID restrictions and returning to school and work have created difficult comps. It does not see year over year comps improving in the May/June timeframe. 

This sentiment was echoed by Tier-1 firm Goldman Sachs. Goldman Sachs lowered its price target to $108 from $124 following earnings. It believes the stock should do well once the company returns to more normalized growth as 2022 ends. 

Costs of revenue totaled $152 million, up 93% y/y. Personal costs, excluding stock-based compensation, were $121 million, up 81% y/y primarily driven by an increase in headcount.

The company continues to build out its Talent Hub to find partners to help build the experience. It is creating ways for both artists and brands to validate the authenticity of their accounts and continues to attract global talent. 

On its call, RBLX highlighted the increased sophistication of its developers. The developer community are hiring business people to develop brands. RBLX is seeing more VC-backed developers joining its platform. This financial backing will help build the business model. 

RBLX has grown developers’ earnings by nearly 5x or 119% compounded over the past two years. These financial incentives continue to attract and keep talented programmers.

Net loss attributable to common stockholders was $143 million compared to a loss of $58.7 million in the prior year.

 The loss in Q4 and FY21 increased over the same period in 20220 due to the higher level of expenses required to support the growth of the business and the fact that it defers a significant amount of revenue to later periods. Since its business decision are based on levels of non-GAAP bookings, it expects to continue to report net losses for the foreseeable future, even as it anticipates generating net cash from operating activities. 

So where do we stand with RBLX?

The stock has been decimated. It has been caught up in the wave of growth names being exchanged for safer value plays. RBLX’s Q4 update featured a faster end to 2021 followed by a slower start to 2022, leading to severe pressure on the stock. This is troubling for investors.

Engagement and payer conversions are higher than they were pre-pandemic but short term visibility remains challenging given the difficult comps arising from the pandemic. 

The ad business is intriguing but also gives us pause as Alphabet (GOOG) announced it would join Apple (AAPL) in establishing stronger privacy parameters for its mobile users. This has taken some of the shine off the digital advertising business model. 

The stock remains expensive as it trades at a price to sales of 16x and a price to free cash flow of 53x. 

When social media started in the mid-2000s, few of us could predict how much time we would eventually spend in the emerging media category. The Metaverse, as a category, is early in its adoption cycle. RBLX is concretely demonstrating for consumers, developers, and merchants what the term means.

Given the short-term volatility around user growth, questions about digital marketing models. and lack of support it makes sense to allow RBLX to marinate at this key $50 psychological level. An ability to hold this area and push back above $60 in coming weeks would suggest that sellers are exhausted, and some new investment money is coming into play. 

The potential growth in the metaverse has investors excited. Roblox stands out as an early winner in the space. Thematic investors may want to jump in at these levels and stash for long-term gains. But if you are playing with a smaller capital load and need immediate returns, we would let RBLX sit until there is further evidence that the bottom is in.