Roblox (NASDAQ: RBLX) jumped significantly after strong Q3 results, and has trended down to the pre-jump price.
Is the correction a return to normal, or will the decline continue? I am bearish on RBLX, due to the believe that growth is over expected, because of the metaverse hype.
Metaverse
Roblox is attached at the hip to the metaverse in many investors’ minds, and seems like an investor buzzword regardless of the product. The problem with that line of thinking is the metaverse is ill-defined, and is a long time away despite the recent buzz. In fact the rise of the metaverse may result in a greater threat than opportunity for Roblox.
Roblox already has similar attributes to the supposed metaverse. It’s social, has community driven content, and a dynamic economy with its own currency. The key difference is at this time Roblox is more centralized than a supposed metaverse.
So what will the metaverse really provide to Roblox?
If Roblox were to join an interconnected decentralized platform which the supposed metaverse would be, Roblox would lose its greatest monetizing strength: control of the economy. Increased inter-connectivity means less control over the ecosystem. If Roblox wants to retain the same control, the positive effects of the metaverse will be minimized.
On the assumption that content is usable between ecosystems, developers for Roblox may adapt their products to the other ecosystems, increasing competition for the same content and players. The upside of a bigger interconnected ecosystem is offset by the increased substitution products.
In summary, the metaverse is being considered to be too large of a catalyst for Roblox, and is way too early on to be considered a significant catalyst.
Roblox’s Financials
Roblox financials are mixed. Net income is still negative, with Q3 having a loss of $74 million, and the first nine months having a loss of $348 million.
Operating cash flow on the other hand, is positive, generating $536 million for the first nine months, however this is largely due to the large amount of deferred revenue of $616 million offsetting the negative net income.
Deferred revenue will most likely be unspent Robux; Roblox’s digital currency. The deferred revenue is overall a plus for Roblox, receiving the cash early while the actual service needing to be provided is almost nil as a variable expense.
The downside is a high liability, meaning players are not spending their Robux, therefore most likely not engaging with the game to the same degree.
Over the last nine months, the total deferred revenue liability has increased 40%, while player daily active user (DAU) count only increased by 27%.
Meaning on average, players have a 10% higher Robux balance. This divergence is most likely caused by Robux balances on dormant accounts, or less active players, assuming the average active player is continuing to hold the same Robux balance.
Daily average playtime increased by 4.1% from Q4 2020 to Q3 2021, which also supports the theory that Robux are sitting on dormant accounts.
On its own, Robux balances increasing is positive as it is a sign of revenue growth, but long-term balance accumulation may be a sign that players are less engaged.
Comparisons
Roblox’s market cap of around 43 billion is larger than developers TakeTwo’s (NASDAQ: TTWO) $19 billion, and EA’s (NASDAQ: EA) $39 billion, both of whom have multiple AAA-game studios under their umbrellas.
EA and TTWO have a price-to-sales of 5.7x each, while RBLX has a significantly higher value of 40.4x.
Revenue growth is expected to be 84%-87% for 2021, which would need to hold for another three years to justify the price-to-sales to be more in line with EA and TTWO. The significant growth rate will be hard for Roblox to hit if player growth stays the same at 35%, as daily bookings per player is expected to fall 8%-9% year-over-year.
The various COVID-19 lockdowns forced many kids indoors looking for some sort of social connection. Expect growth to slow down due to the lifting of COVID-19 restrictions.
Insider Trading
Unsurprisingly insider selling exploded after the Q3 pop, but the recent selling is only part of the story.
Using TipRanks insider trading activity tool, it is easy to see the massive increase in selling as the price rose to all time highs.
Roblox was initially valued at $8 billion in October 2020, before it canceled its IPO in exchange for a direct listing, which generally favors management who are looking to sell.
Although the company has shown great growth in the last year, the massive change in valuation shows investor sentiment has changed, and could just as easily change back which would result in an 80% drop, and alignment with the market comparisons above.
Wall Street’s Take
Turning to Wall Street, RBLX stock earns a Moderate Buy rating with eight Buys, two Holds, and one Sell rating assigned during the last three months. Analysts have an average RBLX stock price target of $113.40.
Conclusion
Roblox rode the metaverse investment wave, which propelled it to too high of a valuation.
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