Should you buy Roblox stock? Feb 2023

Bullish Studio

Link to our Substack: https://www.overlookedalpha.com  Roblox has been public for less than 3 years and its share price performance since the IPO has been quite disappointing. The IPO price was set at $70/share and today, the price is down around 40%.   As a video game company, Roblox attracts almost  60m Daily Active Users (DAUs) with almost 45% of them being under the age of 13. It also attracts developers who contribute on the platform and get paid for their efforts.  The growth of Roblox through the lens of revenue has been nothing but impressive, growing from $325 million back in 2018 to $2.2 billion for the full year 2022. However, revenue growth is clearly slowing down. Revenues grew 82%, in 2020, 108% in 2021 but only 16% in 2022.   The company did make over 500 million in free cash flow in 2021 but it’s clear now that the company was a major beneficiary of the pandemic.  Also, during the same period, gross margin has decreased from 23% to 16% and share-based compensation in 2022 was $589m, which is almost a quarter of annual revenue.   That aside, Roblox’s passionate user base and technology does give the company some leverage. It gets high levels of engagement and could well be an acquisition target for a larger tech company looking to gain a footing in the metaverse.   But, the 20 billion enterprise value means the company is valued at 9 times revenue or 58 times ebitda which would be a steep price to pay for any company. And the company is still several years away from profitability.  Combined with mediocre margins, Roblox doesn’t look like a compelling investment on its own. That’s why I give the stock a bearish rating.

Transcript

00:00 Should you buy Roblox stock, ticker symbol RBLX. Roblox has a market cap of $22.7 billion. It's

00:08 got $3 billion in cash and fairly low debt which translates to an enterprise value of $20.7

00:14 billion. Meanwhile, revenue over the last 12 months is $2.2 billion. Adjusted EBITDA is $356

00:21 million but the company booked a net loss of $924 million in total. Roblox has been public for less

00:28 than 3 years and its share price performance since the IPO has been quite disappointing.

00:33 The IPO price was set at $70 a share and today the price is down around 40%.

00:39 As a video game company, Roblox attracts almost 60 million daily active users with almost 45%

00:46 of them being under the age of 13. It also attracts developers who contribute to the

00:52 platform and get paid for their efforts. The growth of Roblox through the lens of revenue

00:57 has been nothing but impressive, growing from $325 million back in 2018 to $2.2 billion for

01:04 the full year of 2022. However, revenue growth is clearly slowing down. Revenues grew 82% in 2020,

01:12 108% in 2021 but only 16% in 2022. The company did make over $500 million in free cash flow in 2021

01:21 but it's clear now that the company was a major beneficiary of the pandemic.

01:26 Also during the same period, gross margin has decreased from 23% to 16% and share base

01:32 compensation in 2022 was $589 million which is almost a quarter of annual revenue.

01:39 That aside, Roblox's passionate user base and technology does give the company some leverage.

01:45 It gets high levels of engagement and could well be an acquisition target for a larger tech company

01:51 looking to gain a footing in the metaverse. But the $20 billion enterprise value means the

01:56 company is valued at 9 times revenue or 58 times EBITDA which would be a steep price to pay for

02:03 any company. And Roblox is still several years away from profitability. Combined with mediocre

02:10 margins, Roblox doesn't look like a compelling investment on its own. That's why I give the

02:15 stock a bearish rating. But these are my personal opinions not financial advice and I've got no

02:20 position in Roblox stock.

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