Roblox Moves Up On Strong User Growth

Roblox, A Diversified Play On Gaming 

Roblox (NYSE: RBLX) made a splash earlier this year when it went public because it is a diversified play on gaming and gives some great exposure to the mobile market. The company operates in three segments that provide games and entertainment to clients, a platform for developers to build gaming experiences, and cloud-based services of the same sort and all focused on the mobile experience. With the use of mobile accelerating, the shift to digitization for entertainment well underway, exposure to the cloud, and the platform for developers, we see this company doing very well over the next few years. 

Roblox Blows Past User Growth Estimates 

Roblox had a great quarter in every way but one. The company’s GAAP earnings fell short of the consensus as YOY losses accelerate. At first glance, this had us worried but the expenses are due to heavy investment in talent, technology, and innovation that we see fueling user growth, conversions, and long-term profitability. On the top line, the $386.98 million in revenue is up 140% from last year and accelerating on a sequential basis. The strength was driven by a robust increase in user growth that promises to sustain revenue growth over the coming year. 

The company says bookings jumped 161% YOY to $652.3 million to beat the consensus estimate of $572.3 Bookings were driven by a 79% increase in average daily users coupled with a 104% increase in hours-on-platform. ADU gains were notably strong in the international segments, up 87% YOY, and in the above 13 age group, up 111%, which we are not surprised about. The under 13 age group will be harder to monetize and for good reason. 

As for the earnings, the company’s GAAP loss widened but that is not the metric we want to focus on. The company’s operating results show substantial improvements over the past year that point to robust profitability once investment spending slows. The company’s net cash and FCF from operations both increased by high triple-digits with the FCF margin running near 37% proving it can make money. 

“Our first quarter 2021 results enabled us to continue investing aggressively in the key areas that we believe will drive long-term growth and value, specifically hiring talented engineering and product professionals and growing the earnings for our developer community,” says CFO Michael Guthrie.“We believe we must continue to innovate and so remain focused on building great technology to make progress on our key growth vectors, primarily international expansion and expanding the age demographic of our users.”

The Analysts Love Roblox

In the two short months since Roblox first went public, it has attracted the attention of no less than 7 major Wall Street sell-side firms and they are all bullish on the stock. The consensus price target is near $82 or about 20% upside from today’s action but the upgrades are already rolling in following the earnings release. The first is from Morgan Stanley which holds an Overweight rating and upped its price target to the Street high of $87 or about 24% upside. We think that is an easy target to reach. 

Shares of Roblox have been choppy since the direct listing in March but appear to have firm support at the $65 level. Today’s action has the stock confirming this level of support and looking like it could go higher. The stochastic is already showing a fairly strong buy signal but the MACD is lagging. If the price action can get above the 30-day EMA and have MACD confirm the move we see this stock heading up to $80 in the near term and above $90 by the end of the calendar year.