AI Initiatives And Expansion Into India Will Open Future Opportunities

Key Takeaways

• AI-driven functionalities and personalized discovery could enhance user engagement and boost future revenue growth.
  
• Expansion into markets like India and Japan signals potential revenue growth, driven by significant DAU increases.
  
• Slower growth and high competition pose risks to revenue projections, while expansion and optimization challenges could impede user engagement and earnings diversification.

Catalysts

Operates an immersive platform for connection and communication in the United States and internationally.

• The introduction of AI-driven functionalities such as personalized discovery and improved user engagement through AI-based tools is expected to enhance user experience and increase engagement, which could drive future revenue growth.
  
• Expansion into new markets such as India and Japan, where DAU growth exceeds 50%, indicates significant future growth potential in these large markets, likely impacting revenue positively.
  
• Investments in new platforms and technologies, such as 3D streaming and AI-driven innovation, aim to capture new user segments and gaming markets, potentially increasing revenue and market share.
  
• The roll-out of more comprehensive ad products, including potential video ads and increased brand partnerships, suggests a burgeoning ad revenue stream that may significantly impact earnings growth.
  
• The strategy to achieve 10% of the gaming market share by focusing on diverse genres and improving developer economics, which includes enhancing the developer community's share of bookings, should drive higher future revenues and potentially improve net margins.

Roblox Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Roblox's revenue will grow by 27.2% annually over the next 3 years.
• Analysts are not forecasting that Roblox will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Roblox's profit margin will increase from -26.0% to the average US Entertainment industry of 9.2% in 3 years.
• If Roblox's profit margin were to converge on the industry average, you could expect earnings to reach $678.7 million (and earnings per share of $0.9) by about April 2028, up from $-935.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 93.7x on those 2028 earnings, up from -43.5x today. This future PE is greater than the current PE for the US Entertainment industry at 25.0x.
• Analysts expect the number of shares outstanding to grow by 4.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.98%, as per the Simply Wall St company report.

Roblox Future Earnings Per Share Growth

Risks

• Concerns about the ability to drive margins higher while continuing to invest in engineering, trust, safety, and infrastructure could affect operating margins if costs rise faster than revenues.
  
• Slower user growth in certain regions like Eastern Europe, as highlighted by issues in Turkey, might negatively impact overall user metrics and subsequently revenue and earnings growth.
  
• High growth expectations in markets like India necessitate significant performance optimization on low-end devices, posing execution risks that could hinder user engagement and revenue increases.
  
• The ability of the platform to capture 10% of the gaming market, which is described as a 4x opportunity, involves significant competition and technological challenges, presenting a risk to revenue projections if unmet.
  
• While the expansion into advertising is noted, the fact that it is not yet broken out separately implies it might not significantly contribute to earnings in the near term, potentially impacting revenue diversification efforts.

Valuation

• The analysts have a consensus price target of $66.779 for Roblox based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $83.0, and the most bearish reporting a price target of just $30.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.4 billion, earnings will come to $678.7 million, and it would be trading on a PE ratio of 93.7x, assuming you use a discount rate of 8.0%.
• Given the current share price of $60.99, the analyst price target of $66.78 is 8.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.