Stock Analysis

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

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NYSE:RBLX
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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.

NYSE:RBLX Earnings and Revenue Growth November 10th 2021
NYSE:RBLX Earnings and Revenue Growth November 10th 2021

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.

Price/Free cash flow

12-month revenue growth

Roblox

108x

101%

Facebook/Meta

18x

42%

Electronic Arts

27x

14%

Activision Blizzard

18x

18%

Nvidia

97x

68%

NetEase

18x

21%

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.

What are the risks and opportunities for Roblox?

Roblox Corporation develops and operates an online entertainment platform.

View Full Analysis

Rewards

  • Trading at 40.1% below our estimate of its fair value

  • Revenue is forecast to grow 15.33% per year

Risks

  • Earnings are forecast to decline by an average of 5.1% per year for the next 3 years

  • Shareholders have been diluted in the past year

  • Significant insider selling over the past 3 months

  • Volatile share price over the past 3 months

  • Currently unprofitable and not forecast to become profitable over the next 3 years

View all Risks and Rewards

Share Price

Market Cap

1Y Return

View Company Report

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.

Richard Bowman

Richard Bowman

Richard is an analyst, writer and investor based in Cape Town, South Africa. He has written for several online investment publications and continues to do so. Richard is fascinated by economics, financial markets and behavioral finance. He is also passionate about tools and content that make investing accessible to everyone.

About NYSE:RBLX

Roblox

Roblox Corporation develops and operates an online entertainment platform.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation2
Future Growth1
Past Performance0
Financial Health5
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Excellent balance sheet and slightly overvalued.