Roblox (RBLX) develops and operates an online entertainment platform that allows users to explore 3D digital worlds. In March 2021, Roblox stock was listed at $69.5. A sharp rally ensued and the stock made highs of $104 in April 2021.
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Since that time, RBLX stock has witnessed a price correction. After an extended period of consolidation, the stock seems poised for a rally. As a result, I am bullish on RBLX. (See Analysts’ Top Stocks on TipRanks)
Potential Catalysts
The first point to note is that Roblox has been on a high-growth trajectory. For Q2 2021, the company reported revenue growth of 127% to $454.1 million. For the same period, the company reported free cash flow of $168 million, which was higher by 70% on a year-over-year basis.
However, even with strong growth, RBLX stock still trades sideways.
It’s worth noting that for the first half of 2021, the company reported total revenue of $841 million. As a ball-park estimate, Roblox is likely to deliver revenue of around $2 billion for the current year.
At the time of this writing, Roblox has a market capitalization of approximately $45 billion. The stock is therefore trading at 22.5 times 2021 revenue.
It seems that the markets are waiting to see if Roblox can accelerate growth. In all probability, I believe the company will deliver what investors are looking for.
Building Financial Flexibility for Growth
As of Q2 2021, Roblox reported cash and equivalents of $1.8 billion. An annualized free cash flow potential of $650 million will further add to the company’s cash buffer.
Recently, Roblox also announced a $1 billion offering of senior notes. In all probability, Roblox is likely to end 2021 with cash and equivalents of approximately $3 billion.
This cash buffer will help the company in accelerating investments and growth. It’s important to note that the company has already established a subsidiary in India. Additionally, in China, Roblox is available on Android and iOS.
The key point here is international expansion. Roblox mentioned in their Q2 2021 report, that the focus is on building the infrastructure required to scale the company globally. In the next few years, it’s emerging markets that will serve as growth catalysts.
Roblox is a Better Metaverse Play
There has been ample news of Facebook (FB) being re-branded as Meta. The company is looking at the next phase of growth by bringing the metaverse to life.
If metaverse is indeed a big thing in the future, Roblox seems to be a better metaverse play than Facebook.
In its Q3 2021 newsletter, Tao Value elaborates on this view. According to the newsletter, a key differentiating factor between Facebook and Roblox is the stress on security, privacy, and trust.
While Facebook is making an entry into the metaverse, Roblox claims it has been a pure-play for the last 15-years. With metaverse at an inflection point, Roblox clearly seems to be well-positioned to benefit.
As an example, Roblox partnered with Sony Music in July 2021. The idea is to bring recording artists into their metaverse. Similarly, Roblox is supporting a large community of content developers.
With financial flexibility and a push towards global expansion, Roblox seems attractive as the metaverse gains traction. Just to put things into perspective, the metaverse market is likely to be worth $82 billion by 2025.
The potential market size provides some insight on the point that Roblox can be a cash flow machine in the next few years.
Wall Street’s Take
Turning to Wall Street, Roblox has a Moderate Buy consensus rating, based on five Buys, one Hold, and one Sell assigned in the past three months. The average Roblox price target of $89.00 implies 14.1% upside potential.
Concluding Views
RBLX stock has been testing investors’ patience. However, revenue and cash flow growth has been robust.
At the same time, the company has the ability to make big investments due to its substantial cash position.
It, therefore, makes sense to remain invested in the metaverse play. Once the stock breaks out to the upside, the rally is likely to be meaningful.
Disclosure: At the time of publication, Faisal Humayun did not have a position in any of the securities mentioned in this article.
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