Roblox Rules The Metaverse, For Now At Least

Roblox Rockets Higher On Users And Engagement 

Roblox’s NYSE: RBLX Q3 results prove that it rules the metaverse, at least for now. Up and comer Meta, formerly Facebook NASDAQ: FB will surely give the company a run for its money but that’s still to come. Until then, the only real choice for business and industry is Roblox and it is gaining traction. What, exactly, is the metaverse? The metaverse is an interactive virtual world best described as a fully-functional video game that mimics life. 

Imagine, if you will, a game that anyone can log on to and when they log on, they can interact with others in the game. Now imagine walking down the street of that game and encountering, not zombies or SEAL TEAM SIX, but businesses like Williams Sonoma NYSE: WSM, Domino’s Pizza NYSE: DPZ, or CVS NYSE: CVS, businesses that your avatar can walk into and shop. Purchases made in this metaverse are made in real-time via eCommerce with real money and quickly delivered to your door. Perhaps one of those businesses is a venue and you go in to see a concert, or a play, or an HQ to hold a board meeting with your counterparts. That is what the metaverse is and Roblox is making it work. 

Roblox Mixed Quarter Good News For The Market 

Roblox had a mixed quarter to be sure but the key takeaways are users growth, engagement, and conversions which all point to continued double-digit growth. The company reported $509.3 million in net revenue or up 102.2% from last year. That’s awesome news except for the fact it missed the consensus figures by 2000 basis points but there are mitigating factors. Bookings, an indicator of future revenue, is up 28% over last year and beat the consensus while DAU’s and hours per user are both on the rise. DAU’s are up 31% and compounded by a 28% increase in hours per user despite the back-to-school season. We take this to mean strong carryover in the youth group as well as continued growth into the upper age groups and non-game/metaverse aspect of the business. 

Moving down to the earnings, earnings remain strong but a GAAP loss was reported. The good news is that the GAAP -$0.13 in EPS beat the consensus by a penny including significant increases in R&D and advertising spending. The increase in R&D alone, +167% to $138 million, is more than enough to offset the loss and produce a profit. In terms of cash and the balance sheet, free cash flow increased by 7% and capitalization is strong. The company is net cash with $1.9 billion in cash and equivalents on the book and only about $0.200 billion in debt. 

The Analysts Are Mum

Typically, the analysts are pretty vocal in the wake of results like this but so far, the analysts have been mum. That said, price action jumped more than 25% in the wake of the release to trade exactly in-line with the Marketbeat.com analysts consensus estimate. The estimate, notable, has not budged in over three months so the stock is overdue for some analyst’s chatter. The current consensus sentiment is a weak Buy but we think that will change. Roblox is going to face tough competition in the metaverse but it has two things going for it. The first is the first-mover advantage it has a big head start. The second is inter-operability. It is our view the metaverse will become ubiquitous like the Internet and that will breed the need for interoperability. It’s a big metaverse, there will surely be more than one winner in the group. 

The Technical Outlook: Roblox Melts Up 

Shares of Roblox are up more than 25% in the wake of the earnings release and will likely move higher. The questions are how strong will resistance be at the $100 to $103.50 zone and how deep/soon will the pullback be before prices really start to move higher. With prices up as they are we expect profit-taking and consolidation at this level with the potential for a double-digit pullback in prices. For now, the $95 and $90 look like the best targets for strong support. Until we see what the market does, enjoy your profits if you have them and wait for a pullback to buy if you don’t.