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Investment Thesis
We covered Roblox Corporation’s (RBLX) metaverse thesis extensively in our previous articles. If you are new to Roblox, you can refer to the recent ones here and here.
The company reported its FQ4 card recently, but the stock got slashed by the market. In addition, deep concerns were raised by the Street over the durability of its bookings trend, as it estimated relatively tepid January bookings. But, Roblox’s engagement metrics remained resilient. It demonstrated that despite the reopening headwinds, which Roblox wasn’t immune to, it is well-primed to navigate these near-term headwinds.
Furthermore, its stock price also seems undervalued and trading near its most pessimistic price targets (PT). Keen Roblox investors can consider capitalizing on its near-term weakness and add the metaverse leader.
Why Did RBLX Stock Drop?
Roblox bookings trend (Roblox)
Roblox reported a decent FQ4 card, where bookings rose 20% YoY to $770.1M. Bearish investors can undoubtedly point out that Roblox’s bookings trend has a discernible deceleration, as seen above. But, we need to consider the pandemic pull-forward growth seen from Q4’19 to Q4’20, where bookings grew 172%. CFO Michael Guthrie emphasized (edited):
We’re 7 quarters into COVID. In the first 4 quarters, our business grew dramatically, and we had quarters in which our top line was tripling year-over-year. And even this time last year, it was 2.6x what it had been the year before. So we’re obviously lapping some fairly significant growth. What we do know, for sure, is that we’re jumping off into ’22 and into a period where the world is reopening, in a place where we just have never been bigger or better positioned. (Roblox’s FQ4’21 earnings call)
Investors can also glean from the above that its absolute bookings remain robust. It shows that Roblox’s platform has remained resilient despite the pandemic tailwinds wearing off. Growth will undoubtedly normalize, but it doesn’t mean Roblox will go into a decline. As a result, investors need to be more circumspect in deciding which stocks belong to the “pandemic-only” category. We don’t think Roblox should be classified in this category.
Nonetheless, we believe that Roblox will take a couple of quarters to lap its challenging comps. Therefore, short-term investors who wanted to exploit another potential November momentum spike in Roblox stock were hugely disappointed with its January bookings. Roblox estimated that January bookings were between $220M-$223M, up 2-3% YoY. We believe it was the straw that broke the camel’s back as short-term investors rushed for the exit in droves. These investors were concerned about the durability of Roblox’s growth moving forward, codifying Roblox as another “pandemic stock.”
Is Roblox Stock a Good Long-Term Investment?
We think investors would be remiss if they wrote off Roblox’s long-term opportunities just by looking at Roblox’s near-term bookings numbers. Roblox’s engagement metrics have continued to remain resilient, and they continue to report robust average daily active users ((DAUs)). Investors must pay keen attention to engagement because it is fundamental to turning the flywheel on its monetization and other opportunities such as advertising.
RBLX reported DAUs of 54.7M in January 2022, up 10.5% QoQ and 32% YoY. These numbers are impressive. Furthermore, Roblox is also expanding its engagement beyond the U17 age group. CEO David Baszucki articulated (edited): “Our 17 through 24-year-old segment in January grew 51% year on year, which is a wonderful validation of our vision to bring people of all ages together on our platform.” CFO Michael Guthrie also emphasized (edited): “In addition to the high rate of growth in 17 to 24-year-olds, that age demographic did comprise 20.5% of all DAUs in January. So it’s not as though it’s a small segment for us. It’s a large segment, and it’s growing quickly.”
It is a notable development that investors should heed. It demonstrates that Roblox’s maturity as a platform is well on track. In addition, we believe that the older demographic segments will continue to lead its engagement growth, which further broadens the platform’s appeal.
Furthermore, Roblox has already expanded its global reach, insulating the slowdown in its US/Canada segment. We discussed in our previous article that Roblox’s developer ecosystem has expanded to more than 170 countries. In addition, investors should note that US/Canada users comprised just 22.6% of its Q4’21 DAUs. In contrast, it was 33% in Q4’19. Therefore, Roblox has scaled rapidly into its global user base.
But, we must caution that Roblox takes time to monetize these new users. Therefore, there’s a clear bifurcation between its engagement and bookings metrics. Furthermore, the monetization potential of global segments outside the US/Canada could also be lesser. Nevertheless, we believe that expanding its worldwide reach and onboarding these new users are fundamental to Roblox’s metaverse ambitions. And it’s making tremendous progress. Guthrie emphasized (edited):
Payers tend to over time increase their rates of payment and new payers always tend to be on the low end of monetization. So as we add new payers, they tend to come in low and grow over time as a cohort. Returning payers are pretty predictable as a cohort. They tend to grow really consistently for very long periods of time. So we have really high payer retention on the platform. And it’s been true for forever that the new payers are dilutive to overall monetization but the existing payers are continuing to add. (Roblox’s FQ4’21 earnings call)
Is Roblox Stock A Buy, Sell, or Hold?
RBLX stock consensus price targets Vs. stock performance (TIKR)Roblox bookings mean consensus estimates (S&P Capital IQ)
We have highlighted in our previous articles that we think Roblox stock seems undervalued after its massive sell-off. However, despite the post-earnings selldown, we maintain our long-term view of Roblox stock’s potential.
Furthermore, RBLX stock is also trading near to its most pessimistic PTs. In addition, consensus estimates also point to a trough in its bookings growth trend in FQ1’22, as Roblox laps those tough comps. Therefore, Roblox’s bookings deceleration is likely to be transitory. Finally, recall that the company has also yet to monetize heavily on its advertising potential. The company is still testing what works best on its platform as it wants to avoid those digital display advertising that other companies have popularized on their platforms. We think it shows that Roblox cares about its users and its monetization potential. It is going for the long game rather than trying to milk its hard-earned engagement metrics right now.
Therefore, we believe that long-term investors can consider the weakness in RBLX stock to add.
As such, we reiterate our Buy rating on RBLX stock.
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