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Roblox Stock Is a Buy-and-Hold for the Long Term After Its Q4 Beating

In hindsight, the excitement of metaverse in November 2021 marked a top for Roblox (NYSE:RBLX) stock.
Source: Miguel Lagoa / Shutterstock.com
The mobile gaming firm, which caters mostly to children, failed to meet Wall Street’s expectat…

In hindsight, the excitement of metaverse in November 2021 marked a top for Roblox (NYSE:RBLX) stock.

Source: Miguel Lagoa / Shutterstock.com

The mobile gaming firm, which caters mostly to children, failed to meet Wall Street’s expectations. It posted a big earnings per share loss in the fourth quarter.

Bearishness worsened for RBLX stock when the company forecasted weak growth in the current quarter.

With Roblox likely to only show light growth until the summer at the earliest, investors are questioning the prospects for this metaverse play.

Quarterly Loss Dents RBLX Stock

Roblox posted fourth-quarter revenue growing by 83.5% year-over-year to $568.8 million and by 108% for fiscal 2021. Yet, it still lost 25 cents a share, or $143.3 million.

The company is nowhere near operating profitably. Founded in 2014, Roblox must spend heavily on research and development. Costs soared to $173.6 million, up from $60.1 million last year. Infrastructure and trust and safety costs almost doubled to $173.6 million.

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Developer exchange fees of $159.7 million is an acceptable cost. Roblox needs to reward its developer community to enhance its platform.

It is expanding its partnerships, too, including one with First Robotics.

RBLX is aggressively advertising to increase brand awareness with customers. For example, Roblox will keep doing branded events and concerts. Expect metrics including the daily active users, hours engaged and bookings to increase in 2022.

Opportunities and Risks for RBLX

The market sell-off in Roblox’s post-earnings results reduced some overvaluation concerns and the company’s fundamentals continue to improve.

Roblox is opening up its world that increases user engagement. Markets are acting as if users will not return. In January, Roblox posted daily average user (DAU) numbers up 32% from last year.

At 54.7 million DAUs, it has plenty of room to monetize its platform. User engagement, measured by hours engaged, was 4.2 billion hours, up by 26% year-over-year.

The company’s bookings could have been better. Bookings were between $220 million and $223 million last year, up by only 2% – 3% year-over-year. Furthermore, Roblox reported the Average Revenue Per Daily Active User, or ARPDAU, falling to around $4.02 – $4.08 last month. This is a 22% – 23% decline year-over-year.

The Covid lockdown in the last year drove Roblox’s super high growth. People in the U.S. and the United Kingdom stayed at home every day from Monday through Friday.

This also lifted stay-at-home activity on Roku (NASDAQ:ROKU). In addition, people bought Peloton (NASDAQ:PTON) bikes at that time.

Many governments are taking a “live with Covid” stance from here. Omicron is far less likely to lead to hospitalization among the vaccinated. The omicron subvariant is more contagious yet similarly less dangerous than the delta variant.

Investors need to re-calibrate their growth expectations for Roblox. The looser restrictions and low chance of another lockdown will slow Roblox’s growth in the years ahead.

RBLX stock faces tough year-on-year comparisons as a result. In 2023 and 2023, it will have normalized comparisons to report. To re-accelerate growth, the company set a 1 billion-user target. Also, it will change its product to cater to customer needs.

Growth and Fair Value

Roblox is expanding its immersive 3D interactive platform. It has companies like Gucci, Nike (NYSE:NKE), and the NFL coming on its platform. Moreover, those firms are using its Talent Hub to connect with their community. They are using the hub to find additional partners. Together, they interact with fans through more images or videos.

Applying the fundamental growth strategies mentioned above, investors may set a bullish terminal EBITDA multiple in a five-year discounted cash flow model. In this finbox model, assume those metrics:

Metrics
Range
Conclusion
Discount Rate
9.8% – 8.8%
9.30%
Terminal EBITDA Multiple
16.1x – 18.1x
17.1x
Fair Value
$52.94 – $59.81
$56.31

Chart courtesy of finbox

RBLX stock has a fair value of up to $60 assuming revenue growth slows steadily through 2025. In a bullish case, investors may set a higher revenue growth rate starting next year. By then, the company will have new tools on the platform.

This will lead to an improved user experience. In addition, it will have more partners who interact with gamers. This increases the site’s stickiness and improves the monetization potential.

On Wall Street, 11 analysts follow Roblox. The average price target is more than $80, according to Tipranks.

Your Takeaway

Investors treated Roblox as a metaverse play set to grow at historical rates. It is neither. The mobile gaming firm is a compelling virtual playground for a young audience. That does not come without risk. Parents may limit gaming hours their children spend.

Roblox is spending heavily to keep its platform clean and safe. Its registration will eventually top a billion as new customers join the site. With that trajectory, RBLX stock will trade at elevated valuations. Shareholders will not expect it to earn a profit in the near term.

Profits can wait.

Roblox needs to invest on the platform to sustain its long-term growth rates.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.

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