After Earnings, Is Roblox Stock a Buy, Sell, or Fairly Valued?

Roblox RBLX released its first-quarter earnings report on May 9. Here’s Morningstar’s take on Roblox’s earnings and outlook for the stock.

Key Morningstar Metrics for Roblox

• Fair Value Estimate: $50.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Roblox’s Q1 Earnings

• Financial metrics overall were decent during the first quarter, with 19% year-over-year bookings growth on a 17.5% increase in daily active users. Bookings per user were also up 1.6% year over year despite a continued shift toward less-developed markets.
• The concern coming out of the quarter is that player engagement has tailed off a bit. Growth in hours of engagement decreased from 21% in the fourth quarter to 15% in this quarter. There is a fear that billings growth is going to sharply decelerate over the balance of 2024. Management guided as such, cutting its bookings forecast for the year by about 4%, implying 15% growth for the year, down from 20%.
• Management claims it has pinpointed the issues that have hampered engagement and has taken steps to fix these, with growth in the US and Canada already reaccelerating. But the guidance cut shows a lack of confidence that these improvements will be sustained globally.
• We believe Roblox is a really interesting company that is growing its reach at a solid clip, if not quite as quickly as hoped prior to first-quarter earnings. With a current enterprise value below $20 billion, we think the upside is attractive. The firm hosts 16 million daily active players in the US who spend nearly $150 annually. There are another 62 million outside the US who spend $24 per year on average. It has an advertising business that is just getting off the ground, admittedly one that needs to be careful given the heavy concentration of kids on the platform. We don’t believe it’s unreasonable to expect 100 million people to be on Roblox each day at some point over the next few years, generating more than $5 billion in annual sales.

Fair Value Estimate for Roblox Stock

With its 4-star rating, we believe Roblox’s stock is undervalued compared with our long-term fair value estimate.

Our $50 fair value estimate uses non-GAAP revenue (bookings) as a starting point. Customers often purchase and spend Robux well before accounting rules allow Roblox to book revenue. Despite reporting net losses, the firm has consistently generated positive free cash flow over the past several years. Thus, we believe that bookings provide a better picture of the Roblox business model and its ability to generate cash flows.

We now project that bookings will increase 16% in 2024 to $4.1 billion, down from 20% previously, based on weakening trends seen during the first quarter and management’s reduced outlook. We’ve also tempered our longer-term growth assumptions, resulting in 12% average annual growth over our 10-year explicit forecast, down from 13%. We continue to expect steady expansion of the player base over this period, with 9% average annual growth to reach nearly 160 million daily active users in 2033. This growth will be propelled by the firm’s network effect, as the current user base continues to attract more developers who create new games that attract more users. The social aspects of playing with friends will also help to expand the base.

Read more about Roblox’s fair value estimate.

Economic Moat Rating

We assign Roblox a narrow moat rating derived from the network effect. The Roblox platform consists of three separate pieces that work together. The first is the Roblox Client, which players use on PCs, Android, iOS, and Xbox One to play games, connect and chat with friends, and make purchases. Roblox Studio, the second piece, is the development environment for users to create, publish, and operate their games. The final piece is Roblox Cloud, the infrastructure for both online games and development.

Roblox doesn’t generate revenue from the sale of the Roblox client, games, or server space, but it makes money via in-game transactions, avatar cosmetics, private servers, subscriptions, premium development plug-ins, and advertising. All of these transactions are done in Robux, the Roblox currency that can be purchased at multiple price points with an effective exchange rate in the US from $0.0125 per Robux (400 Robux for $5) to $0.0089 per Robux (22,500 Robux for $200). Users can subscribe to monthly premium plans to lower the exchange rate. Roughly 90% of Robux are spent within three days of being purchased, but the revenue for durable virtual goods is recognized over the assumed life of the player.

Read more about Roblox’s moat rating.

Financial Strength

We believe that Roblox’s financial health is solid. The company has $0.5 billion of cash and equivalents and $1.0 billion in debt as of June 2023. Roblox is largely self-funded thanks to deferred revenue as customers provide cost-free capital to invest back into the business. Despite not posting positive net income in any of the years between 2018-20, the firm has posted roughly breakeven free cash flow in 2018 and 2019 and generated very strong free cash conversion of GAAP revenue of 45% in 2020 despite an earnings-before-interest loss of $251 million. We project the firm will continue to produce free cash over the next five years in aggregate despite not posting positive net income until 2026.

We project cash flow allocation over the near term to be balanced among research and development and smaller acquisitions.

Read more about Roblox’s financial strength.

Risk and Uncertainty

Roblox operates in a highly competitive marketplace against firms with more financial and development resources. While Roblox’s platform is a unique offering, the firm still competes with video game publishers both to attract new users and to hold on to their current players as they grow older. A key driver to the firm’s long-term growth will be keeping younger users as they age into and out of their teen years, as over two thirds of users are under the age of 17 and around 40% are under 13 years old.

Read more about Roblox’s risk and uncertainty.

RBLX Bulls Say

• Roblox is uniquely positioned to take advantage of the trend toward increased screen time among younger consumers.
• Roblox’s business model allows the firm to self-finance while it focuses on expanding its subscriber base and monetization.
• Roblox will benefit as its user base grows older and has more disposable income.

RBLX Bears Say

• Roblox’s tremendous subscriber growth was highly stimulated by the pandemic. Growth, especially in established markets, has slowed sharply.
• Roblox’s model will invite regulatory scrutiny and force the firm to spend more money on moderation, limiting margin expansion.
• Roblox’s competitors have more development resources and offer games with better graphics and deeper gameplay. As Roblox users grow up, they will leave the Roblox metaverse for other gaming experiences.

This article was compiled by Leona Murray.