Roblox Q1 Earnings: Growth Metrics Still Good, Still Bullish (RBLX)

Overview

Roblox (NYSE:RBLX) released earnings during premarket hours and posted a marginal beat against top line estimates while materially missing bottom line estimates.

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Source: Excel, Seeking Alpha

Adjusted EBITDA also came in below consensus, at $53.1M against expectations of $64.9M (22.2% miss).

This article will review Roblox’s earnings report in detail while commenting on its performance while also providing an updated forward-looking valuation.

Earnings Report – User Metrics

While financial metrics came in below expectations, Roblox user metrics remained robust. The past quarter saw Roblox posted record levels of DAUs at 66.1M, an increase of 12.4% quarter-over-quarter and 22.2% YoY.

Hours of engagement across the Roblox platform also came in at a record level, with 14,493 hours spent by users on Roblox for the most recent quarter. This was an increase of 13.2% quarter-over-quarter and 22.6% YoY.

Bookings (revenue) were down significantly (13.96%) quarter-over-quarter while being up 22.6% YoY. Given the evident cyclicality of Roblox’s bookings, I’m not reading too far into the quarter-over-quarter change and still consider this to be a good rate of growth.

Average bookings per daily active user also normalized from last quarter but only grew 0.26% YoY.

It is notable that the average bookings per daily active user metric continued to show positive growth even as daily active users grew briskly at 22.2% YoY. This means that Roblox is technically improving its ABPDAU unit economics if users were held constant.

Paying user growth and retention metrics came in solid, with a higher than average new monthly unique payer number of 2.7M and a record returning monthly unique payer base of 11.2M.

Average bookings per monthly unique payer grew marginally at 3.3% YoY.

Earnings Report – Cash Flow

Roblox posted increased operating cash flows but reduced free cash flow YoY for Q1 2023. The company is continuing with a brisk level of capital expenditure, having significantly increasing its PPE spend 76.1% YoY.

Operating cash flow rose 11.09% while free cash flow declined 27.74% YoY due to the higher capex.

Valuation

While Roblox’s latest quarter gives me confidence in its continued ability to grow, it is of course important to translate this into a forward-looking valuation.

The relative value for RBLX stock will come down to assumed growth rates. The table below extrapolates 3 distinct growth rates to create 3 distinct bull scenarios for the company’s future revenues:

1. (Conservative) Latest fiscal year YoY growth: 15.94%
2. (Middle) Latest quarterly YoY growth rate: 22.01%
3. (High Growth) Three year CAGR: 63.57%
   1. This is halved after 3 years (31.79%) and halved again after another 3 years (15.89%)

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Source: Excel, Seeking Alpha

The conservative scenario indicates that Roblox will still be trading at a premium to its sector within 10 years. By this measure, RBLX stock is quite expensive relative to the Communication Sector median price/sales multiple (1.19) even a decade into the future; it would be difficult to call it a buy under these circumstances.

The middle scenario extrapolates the company’s latest quarterly growth rate a decade ahead. This growth rate also indicates that Roblox is priced beyond 10 years into the future and that it would still be trading at a 28% premium to the sector median a decade ahead. This would be a fair price at around 12 years, but shouldn’t be considered particularly exciting for investors.

The high growth scenario makes use of the company’s 3-year CAGR with a 3 year half-life. This scenario shows that Roblox would achieve sector parity by 2027 and then be significantly undervalued at current prices afterwards.

Given the ongoing momentum that the company has, my belief is that the highest probability outcome is that the firm’s revenue growth rate will come in somewhere between the middle case and the high growth case. This would imply that RBLX stock is forecast to achieve sector parity somewhere between 2027-2030. As such, it is priced less than a decade into the future and should be considered a buy for growth investors.

Risks

The core risk here is that Roblox sees a compound annual growth rate somewhere below the middle-of-the-road estimate given above. This can occur due to competitive pressures from its main competitors – Unity Software (U) and the private company Epic Games. Both of these companies are also growing rapidly and offer competing game engines.

The differentiator here for Roblox is its strategy. Roblox doesn’t simply sell its game engine software; it provides a marketplace (two-sided network) in which developers can readily monetize their work. This creates a favorable positive feedback loop akin to what we see in marketplace businesses such as Uber (UBER). The more users on the platform, the more developers can earn; the more developers on the platform, the more content users have to engage with.

The latest quarter saw Roblox increase the number of its monetized-developers by 63% YoY, ending at over 4 million. This is certainly robust.

The other risk is user flight. Gaming consumers are notoriously finicky and can change their consumption patterns quickly. Roblox business model, while hedged, is not immune to this.

The hedge occurs as Roblox is not a video game; it is an evolving set of video games produced by its developer community. This creates a dynamic offering as opposed to a static one. Observers of the company’s product can note the impressive recreation of Call of Duty gameplay that was built on the platform 2 months ago.

Conclusion

The metrics for Roblox indicate that it is a company that is still trying to grow rather than optimize itself for profitability or cash flow generation. This is evidenced by Roblox’s significantly higher YoY capital expenditure. This strategy is validated for now by the company’s ongoing robust growth in daily active users, total engagement hours, and per-user monetization metrics. All of these metrics are heading in the right direction, albeit at different rates. Together they indicate that Roblox still has market share to take and that it can continue growing at double-digit rates in the immediate future – all the while steadily improving unit economics.

Overall Roblox is still acting like a growth stock while also performing like one. It should be considered from a growth lens and not yet traded on the basis of profitability or cash flow metrics; this company is definitely still scaling up. Given the factors pointing to a continued growth trajectory, I remain bullish on Roblox for the long term.