Roblox's (NYSE:RBLX) Valuation appears more Reasonable when you consider the solid Cash Flows

Shares of Roblox Corporation (NYSE:RBLX) closed 42% higher yesterday after the company announced its third quarter financial results. The feature that stood out for the market was better than expected bookings and positive guidance. The result was notable as some analysts feared the easing of Covid-19 restrictions would reduce engagement. 

The fact that the company is also a leading metaverse play no doubt also added demand for the stock. With the current hype around metaverse stocks, it’s worth considering the sustainability of the current valuation.

Third Quarter Highlights:

• Revenue up 102% YoY to $509.3 million.
• Net loss $74.0 million increased from a $55.9 million loss a year ago.
• Free cash flow up 7% YoY to $170.6 million.
• Bookings up 28% YoY to $637.8 million
• Average Daily Active Users up 31% YoY to 47.3 million.
• Hours Engaged up 28% YoY to 11.2 billion.

See our latest analysis for Roblox

Is Roblox still cheap?

Ahead of these results, Roblox was trading on a price to sales ratio of 31.6x, and this has risen to 47.5x with the price at $109. Either way, this is a high price to sales ratio, but needs some context.

With negative EPS, a price-to-earnings (P/E) ratio for Roblox is meaningless. However, as the following graph illustrates, Roblox actually has strong cash flows relative to its net income.

We can use the cash flows to compare the valuation to similar companies, by comparing the cash flow to the  market capitalization. In the case of Roblox, this ratio was 61x at yesterday’s close and it’s about 108x at a price of $109.

We can also compare this ratio to that of other gaming and metaverse related stocks, with revenue growth for context.

Our estimate of the intrinsic value for Roblox, based on analyst forecasts, was $93.8 yesterday. So the stock is now trading at a small premium to this estimate - though forecasts are likely to rise in the coming days.

What this means for you:

While the valuation may appear rich, it’s not that stretched when we compare Roblox’s price to free cash flow ratio to similar companies and take revenue growth into account. The current share price is alos close to our estimate of its fair value. But there are a few other points to consider:

• Today’s price move probably has as much to do with positive sentiment surrounding the metaverse as the results. Going forward the share price may have a lot to do with ‘metaverse hype’, rather than business fundamentals.
• The current valuation suggests growth rates will remain high, so if they do not the valuation may be at risk.
• The strong cash flows don’t account for substantial stock-based compensation. The share count has also risen substantially in the last year. Shareholders should expect dilution in the future.

You can keep an eye on how much analyst forecasts change in the coming weeks by referring to our analysis of Roblox. If you would like to know more about Roblox’s business, take a look at this deep dive on Roblox which we published shortly after the IPO.

If you are no longer interested in Roblox, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

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Simply Wall St analyst Richard Bowman and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.