After Earnings, Is Roblox Stock a Buy, a Sell, or Fairly Valued?

Roblox released its third-quarter earnings report on Oct. 31. Here’s Morningstar’s take on Roblox’s earnings and stock.

Key Morningstar Metrics for Roblox

• Fair Value Estimate: $55.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Roblox’s Q3 Earnings

• Roblox is ahead of where we initially predicted it would be at the end of the year, with 89 million daily active users in the third quarter. While we don’t think the firm can continue to add DAUs at a 26% year-over-year clip for much longer, it has fantastic momentum.
• There remains room for growth (if modest) in the United States and Canada. Roblox earned $35 on average from domestic players during the quarter, vastly more than from Europe ($10) or Asia-Pacific ($5). Through soon-to-be-released pay-to-play games and partnerships with the NFL, the US will remain the most important region and keep bookings growth high.
• Content moderation is still a large concern. While the company has invested 25% of net bookings into trust and safety features, Roblox could be forced to spend significantly more to placate regulators and parents. While a more comprehensive parental control system is on its way, such changes may not reduce the amount of explicit content, but only those exposed to it.
• Future growth will be driven by Roblox’s network effect, whereby the growing user base attracts developers, who create new games that attract more users. Average bookings per DAU will grow in a lumpy and less consistent manner as new users come from international markets. Though Roblox should gain leverage, we expect a large amount of stock-based compensation to delay positive operating income by our measure until 2026.

Fair Value Estimate for Roblox

With its 3-star rating, we believe Roblox stock is fairly valued compared with our long-term fair value estimate of $55 per share, which uses non-GAAP revenue (bookings) as a starting point. Customers often purchase and spend Robux well before accounting rules allow Roblox to book revenue. Despite reporting net losses, the firm has consistently generated positive free cash flow over the past several years. Thus, we believe bookings provide a better picture of the business model and its ability to generate cash flows.

We now project bookings will grow 21% in 2024 to just under $4.3 billion, up from 18%, based on faster DAU growth than we previously expected and management’s improved outlook. We’ve maintained our longer-term growth assumptions, resulting in 12.5% average annual growth over our 10-year explicit forecast. We continue to expect a steady expansion of the player base over this period, with 9% average annual growth to reach 165 million daily active users in 2033. The firm’s network effect will propel this growth. The social aspects of playing with friends will also help to expand the base.

We also expect continued growth in monetization, albeit in a lumpy manner. We project that average bookings per DAU will grow modestly over the next three years as the new user mix shifts toward emerging markets. Afterward, we expect growth to be driven by a slight increase in the age profile of users and by more diverse and complex games. We expect growth in the latter half of our forecast to also come from advertising/branding, as the growing user base will attract sponsors targeting young adults.

Read more about Roblox’s fair value estimate.

Economic Moat Rating

We assign Roblox a narrow moat derived from its network effect. The Roblox platform consists of three separate pieces that work together. The first is the Roblox Client, which players use on PCs, Android, iOS, and Xbox One to play games, connect and chat with friends, and make purchases. Roblox Studio, the second piece, is the development environment for users to create, publish, and operate their games. The final piece is Roblox Cloud, the infrastructure for both online games and development.

Roblox doesn’t generate revenue from the sale of the Roblox client, games, or server space, but it makes money via in-game transactions, avatar cosmetics, private servers, subscriptions, premium development plug-ins, and advertising. All of these transactions are done in Robux, the Roblox currency that can be purchased at multiple price points with an effective exchange rate in the US from $0.0125 per Robux (400 Robux for $5) to $0.0089 per Robux (22,500 Robux for $200). Users can subscribe to monthly premium plans to lower the exchange rate. Roughly 90% of Robux are spent within three days of being purchased, but the revenue for durable virtual goods is recognized over the assumed life of the player.

Read more about Roblox’s economic moat.

Financial Strength

We believe Roblox’s financial health is solid. The company has $1 billion in cash and equivalents and $1 billion in debt as of June 2024. The firm is largely self-funded with deferred revenue, as customers provide cost-free capital to invest back into the business. Despite not posting positive net income in 2018-20, the firm has posted roughly breakeven free cash flow in 2018 and 2019, and it generated strong free cash conversion of GAAP revenue of 45% in 2020 despite an earnings-before-interest loss of $251 million. We project the firm will continue to produce free cash over the next five years in aggregate despite not posting positive net income until 2026.

Read more about Roblox’s financial strength.

Risk and Uncertainty

Roblox operates in a highly competitive marketplace against firms with more financial and development resources. While Roblox’s platform is unique, the firm still competes with video game publishers to attract new users and hold onto current players as they age. A key driver to the firm’s long-term growth will be keeping younger users as they age into and out of their teen years, as over two-thirds of users are under 17 and around 40% are under 13.

Read more about Roblox’s risk and uncertainty.

RBLX Bulls Say

• Roblox is uniquely positioned to take advantage of the trend toward increased screen time among younger consumers.
• Roblox’s business model allows the firm to self-finance while it focuses on expanding its subscriber base and monetization.
• Roblox will benefit as its user base grows older and has more disposable income.

RBLX Bears Say

• The pandemic greatly stimulated Roblox’s tremendous subscriber growth. Growth has slowed sharply, especially in established markets.
• Roblox’s model will invite regulatory scrutiny and force the firm to spend more on moderation, limiting margin expansion.
• Roblox’s competitors have more development resources and offer games with better graphics and deeper gameplay. As Roblox users grow up, they will leave the Roblox metaverse for other gaming experiences.

This article was compiled by Sokhoeun Noeut.