Roblox: Excellent Company, But High Valuation

Roblox Corporation (RBLX) provides a platform for developing and playing games in the metaverse. The metaverse is a 3-dimensional interface that users connect to through the internet. Users then interact with each other and with the game, using avatars. Games on Roblox are developed by users and can be played for free. The company makes most of its revenue by selling in-game currency to players; the currency is known as Robux.

I am neutral on RBLX stock.

Pandemic Explosion

Children and adults stuck at home during the pandemic drove massive growth and adoption for Roblox during 2020. Revenues swelled from $162 million in Q1 2020 to $387 million in Q1 2021. This nearly 140% year-over-year increase is startlingly impressive.

As stay-at-home orders were gradually lifted, many expected Roblox’s revenues to decline, but it has proven quite resilient. Q2 2021 and Q3 2021 revenues came in at $454 million and $509 million, respectively. The year-over-year growth rates for Q2 and Q3 were also impressive, however they slowed to 127% and 102%, respectively.

Adult Players Increase

Daily users of the platform also increased exponentially during the early days of the pandemic. To continue to grow as a company, the user base must continue to increase, with or without a worldwide pandemic. At Roblox, there are positive indications from Q3 2021. The daily active users increased over Q2 2021, moving from 43.2 million to 47.3 million. The year-over-year increases for Q2 and Q3 were 29% and 31%, respectively. The acceleration in daily user growth is a vital sign.

Users over 13-years-old outnumbered those under 13-years-old for the first time during Q3. This is a very positive sign, because older users typically can spend more on their gaming habits and may be less fickle than younger users. The Q3 users also spent more time on the platform than in previous periods. Roblox reported over 11.1 billion engagement hours in Q3, up from 9.7 billion in Q2. Obviously, longer engagements will lead to more revenue for Roblox.

High Valuation

Roblox is not profitable, despite the explosion in revenue and assistance from the pandemic. Roblox went public in March of 2021 and was not expected to be immediately profitable. With that said, the table has been set for the company, and it must take advantage during this period.

The stock price has come down significantly from its 52-week high, reached soon after Q3 earnings were released. It currently trades more than 27% lower than this high. This does not make it a cheap stock to own, however. Roblox is trading at a price-to-sales (P/S) ratio around 30. With interest rates set to rise and concern over growth stock valuations, the stock price could quickly go lower due to this valuation. On the plus side, competitor Unity Software currently trades at a P/S ratio over 39.

Wall Street

Turning to Wall Street, Roblox receives a Moderate Buy consensus rating, based on eight Buy ratings, two Hold ratings, and one Sell rating. The average Roblox price target of $116.90 implies 14.81% upside potential. The spread between the high price target of $150 and the low of $70 is quite vast and signals staunch disagreement among analysts.

Better Entry Points to Come

Roblox has benefitted greatly from the pandemic. Revenues and users are up substantially and continue to rise. Q3 2021 results were impressive, and the stock took off as a result. The share price has now come down significantly from these highs; however, it still likely has further to fall due to the immense valuation and macroeconomic conditions that are unfavorable to growth stocks. There are likely better entry points ahead for Roblox stock.

Disclosure: At the time of publication, Bradley Guichard did not have a position in securities mentioned in this article.