Roblox: Loading Up On The Dip (NYSE:RBLX)

Roblox (NYSE:RBLX) stock suffered a steep plunge (>20%) after the company reported results for the first quarter of 2024. Although the performance in Q1 was solid, investors were displeased with management’s Q2 guidance and FY 2024 outlook cut for bookings. While a guidance cut is always very disappointing, I am confident in Roblox management’s ability to address monetization headwinds, ultimately bringing the bookings CAGR through 2027 back to the original guidance of >20%. While I turn slightly less optimistic on Roblox shares post guidance cut, I remain quite bullish overall on Roblox unique franchise value and long-term ability to drive user and monetization growth. On that note, I point out that shares are trading relatively cheap against my target price for the stock ($72/ share, see here); and I suggest to consider the recent sell-off as an attractive dip-buying opportunity.

For context, Roblox stock has strongly underperformed the broader U.S. stock market, YTD. Since the start of the year, RBLX shares are down approximately 31%, compared to a gain of about 9% for the S&P 500 (SP500).

I have previously covered Roblox stock with a Buy thesis, back in February this year – see here. Since the article has been published, RBLX shares are down about 30%, while the S&P 500 has appreciated 5%.

Roblox Reports Solid Q1 Results

RBLX announced its results for the first quarter of 2024 and reported an overall solid performance, with both bookings and profitability approximately in line with consensus estimates: During the period from January to end of March, the San Mateo based gaming/ social media company reported total bookings of $924 million, up about 19% YoY compared to the same period one year earlier. According to company disclosures, the topline growth was solid across regions, but was spearheaded by exceptionally strong growth momentum in APAC.

As ARPU increased only slightly YoY, $11.89 vs $11.70 one year earlier, booking expansion was carried mostly by DAU growth, which jumped to a record 77.7 million (up 18% YoY): In Q1, Roblox saw exceptionally strong growth in users aged 13 years and older (up 22% YoY), as well as in APAC (up 26% YoY, with Japan and India standing out with >50% YoY user growth).

On profitability, Roblox adjusted EBITDA came in at a loss of $7million, compared to a loss of approximately $51 million for the same period one year earlier. On that note, management highlighted that the profitability expansion was almost exclusively driven by operating leverage, as Roblox managed to keep fixed cost, incl. infrastructure, trust and safety as well as headcount, flat over the past 4 quarters. CEO David Baszucki commented:

The past three quarters on infrastructure, trust and safety, well the platform performing better and better in all of these areas and the quality going up through the use of AI, internal efficiency, the way we have optimized our infra and our trusted safety we have actually made huge efficiency gains there, and we have reduced these costs. On the personnel side, we’ve been very thoughtful in how we are hiring and how we are growing our headcount.

We’ve been relatively consistent over the last three quarters and the size of our headcount, while we continue to focus on growing our economy ads team, our AI safety team and our live operations events team. I just want to highlight what we — on the theme we started three quarters ago, which is getting bookings growing faster than other areas, we continue down that path.

For Q1, net cash from operations was reported at $239 million (up 37% YoY) , and free cash flow came in at $191 million (up 133% YoY).

… But Guidance Disappoints

While Roblox’ Q1 results were overall solid, as highlighted in the previous section of the article, the outlook for Q2 came in below expectations (slightly): RBLX’s guidance for Q2 bookings came in at $870-900 million, reflecting YoY growth of only 13%, and falling short of the consensus estimate of $940 million. In addition, investors were very surprised to learn that the 2024 bookings forecast for Roblox is to be revised downwards by about 4%, to $4,000-4,100 million, representing a 15% YoY growth. However, despite the lower topline outlook, the adjusted EBITDA guidance remains unchanged, with management again pointing to operating leverage.

Despite understanding that Q2 bookings might display unusual seasonality due to factors like the Leap Year, The Hunt, as well as the shift in Easter timing, the reduction in the full-year outlook was not expected. And investors are now questioning the credibility of Roblox’ long-dated >20% booking CAGR through 2027. However, Roblox management remains confident in its ability to drive bookings growth back to >20% growth from 2025 to 2027, and accordingly reaffirmed its long-term guidance.

Challenges Likely Temporary

I believe that RBLX’s disappointing bookings growth in the first quarter and its underwhelming forward outlook can be primarily traced back to two key factors. Firstly, the slower rollout of new content, compounded by challenges in content discovery that limited its visibility to users. Secondly, there was a notable decline in app performance, particularly on lower-end Android devices, after the company introduced several technological updates in the second half of 2023, like layered clothing and dynamic heads. These updates adversely affected app loading times, frame rates, and the overall user experience.

Roblox management has drafted a clear strategy to solve the challenges faced in Q1, outlining several measures to address these issues and rejuvenate user engagement. Most notably, the company is adopting a more dynamic approach to live operations and aims to build on the success of its “The Hunt” event from March with more live events throughout the year. This strategy is intended to reverse the downward trend in daily active users and time spent on the platform observed so far this year, thereby restoring growth in the number of new paying users. While Roblox has not shared a schedule for events, CEO David Baszucki suggested that events can likely be expected every 1-2 months (thus, projecting 2 events per quarter should be reasonable). Additionally, RBLX is implementing initiatives to enhance its digital economy by expanding access to the user-generated content (UGC) marketplace and efforts are underway to optimize app performance on low-end Android devices to improve user experience.

On a high level commentary, and this has been the key insight for me from the entire conference call, Roblox management has suggested that bookings growth may again be on-track for a >20% CAGR as early as Q2 2024. So the sharp sell-off in Roblox shares may be viewed as a gross overreaction.

And once again, over the last three months, we have made a lot of expansions and enhancements in our search and discovery system that we’ll talk about with you. We’ve also taken a lot of steps on live ops and content that we’ll talk about. We’ve done a lot of stuff around our economy in the last three months. And I want to highlight, over the last — really the last half of April and the first half of May, we have seen USA and Canada bookings, DAUs and hour growth come back to north of 20%.

Valuation Looks Very Cheap

I argue that the RBLX stock is trading at a bargain price, especially when compared to my previously estimated long-dated target of $72 per share (assuming 525 million DAUs, $55 ARPU, 22% net margin, and a 14% rate, vs. about 8% for a blue chip company like Apple) by 2030.

For context, here is how I previously valued Roblox:

If Roblox’ push into 17+ experiences is as successful as I project it to be, then the 325 million DAU could likely understate the platform’s 2030 potential by at least 100-125 million gamers, reflecting on >3 billion active, addressable video gamers worldwide. Moreover, if Roblox successfully attracts more mature gamers, there is also an argument to be made that the $50/DAU is underestimating monetization potential, because 17+ gamers likely come with a richer wallet.

Fine-tuning my expectations for Roblox through 2030, I now raise my 2030 DAUs estimate to 425 million, and I raise my monetization estimate to $55/DAU. However, I continue to anchor on a 24% net profit margin, as well as a 3.5% terminal growth rate projection. Based on these assumptions, I now calculate a fair implied target price of $78.11/share.