Can Roblox Stock Recover To $70 Levels? Consider Bookings Growth And Valuations

Summary

• Roblox's share price dropped after it announced its recent quarterly results, as the company's YoY bookings growth rates in Q4 2021 and January 2022 have slowed considerably.

• A rebound in RBLX's shares is likely to happen in 2H 2022, when the company's bookings growth accelerate again benefiting from an easier base for comparison.

• But a recovery to the $70 price level is quite challenging considering the implied valuation multiples and the weakness in Roblox's US & Canada region.

• Roblox is a Hold after taking into account both the stock's unappealing valuations and positive expectations of bookings growth acceleration in 2H 2022.

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Elevator Pitch

I have a Hold investment rating assigned to Roblox Corporation (NYSE:NYSE:RBLX). In my previous August 12, 2021article, I cautioned that RBLX's "valuations have factored in the company's decent growth outlook to a large degree" and noted that "bullish investors have to consider the risk of a valuation de-rating." Roblox's shares have almost halved in the past six months since my earlier update; RBLX's last traded stock price was $45.24 as of March 3, 2022 as compared to its share price of $84.04 at the point of publication of my earlier article. This article touches on the potential of a share price recovery for Roblox.

I don't see Roblox's shares recovering to $70 or anywhere close in the near term, as the implied Enterprise Value-to-Revenue and EV/EBITDA multiples will be very rich and hard to justify. On the flip side, there could be a modest rebound in RBLX's shares when the company sees an acceleration in its bookings growth again in the second half of this year. As such, I maintain my Hold rating for Roblox's shares.

Why Has Roblox Stock Dropped?

Roblox's shares have significantly underperformed the S&P 500 and dropped by -64% since late-November 2021 as per the chart below.

RBLX's Stock Price Performance Since Late-November 2021

Seeking Alpha

Roblox's disappointing Q4 2021 and January 2022 bookings confirmed investors' worst fears that the company will witness a substantial weakening of its growth momentum as the economy reopens and Work-From-Home tailwinds resulting from COVID-19 ease. Such concerns and worries are the key reason for RBLX's stock price weakness in recent months.

RBLX reported itsfinancial results for the fourth quarter of 2021 on February 15, 2022 after the market closed, and the company's share price fell by -26% from $73.30 as of February 15, 2022 to $53.87 as of February 16, 2022 in response to the recent quarterly results announcement.

As per the company'sQ4 2021 results presentation slides, Roblox's bookings increased by +20% YoY to $770.1 million in the most recent quarter. Notably, this was the slowest YoY growth in bookings that the company has registered in the past 11 quarters. As a comparison, RBLX delivered relatively higher bookings growth of +161%, +35%, and +28% for Q1 2021, Q2 2021 and Q3 2021, respectively on a YoY basis. As part of the fourth-quarter results release, Roblox also disclosed that it achieved bookings in the $220-$223 million range for January 2022. This translated into a -40% MoM (Month-on-Month) drop and a +2-3% YoY increase in bookings.

Is Roblox Stock Expected To Rebound?

Roblox is expected to rebound from current price levels.

Looking ahead, RBLX mentioned at the company'sQ4 2021 earnings briefing that "we're going to start getting more normalized comparisons" for bookings "late this year." Roblox still has to deal with a high base for comparison in 2Q 2022, with the company referring to "May, June" 2021 as "difficult compares." This suggests that Roblox could possibly see an acceleration of bookings growth on a YoY basis again in the second half of 2022.

Also, Roblox also continues to make decent progress in the key growth areas of the company. I highlighted in my previous update on the company in August 2021 that "aging up" and "international expansion" are the main intermediate-to-long term growth drivers of the company.

On aging up, RBLX saw its users aged between 17 and 24 years old grow +51% YoY in January 2022 and users in this age group accounted for approximately a fifth of the company's daily active users in that month as disclosed at its fourth-quarter earnings call.

In relation to expansion in foreign markets outside the US, the Asia Pacific market was the star for RBLX. Roblox's daily active users doubled from 5.6 million in the fourth quarter of 2020 to 11.2 million in Q4 2021. This also meant that RBLX's proportion of total daily active users derived from the Asia Pacific region rose from 15% to 23% over the same period. Roblox also revealed at its most recent quarterly results briefing that its daily active users in two key Asian markets, India and Japan, saw their respective daily active users increase by more than +100% YoY in Q4 2021.

In summary, the potential rebound in Roblox's share price will be driven by an acceleration of bookings growth, further progress in aging up, and foreign markets expansion.

But the extent of Roblox's stock price rebound might not be as significant as investors would have hoped for, which I discuss in the next section.

Can Roblox Stock Reach $70 Again?

As explained in the preceding section, I am of the view that Roblox's shares can rebound. But I don't see Roblox stock reaching $70 again soon, which will imply a +55% upside as compared to the company's share price of $45.24 as of March 3, 2022.

There are two factors that will cap Roblox's capital appreciation upside.

Firstly, the recent performance of Roblox's core US & Canada markets is a major concern.

As indicated in the company's Q4 2021 earnings presentation, RBLX's daily active users for the US & Canada region declined by -1% YoY in Q4 2021 as compared to YoY growth rates of +5% and +6% in Q2 2021 and Q3 2021, respectively. Notably, the YoY increase in the US & Canada markets' daily active users ranged from +28% to +90% between the first quarter of 2019 and the first quarter of 2021.

There are two key negative implications here.

One implication is that Roblox's user growth in the mature US & Canada markets might have already reached saturation point. It is uncertain if the strong growth in foreign markets like the Asia Pacific region will be able to fully offset the weakness in the US & Canada geographic region going forward.

Another implication is that RBLX's overall monetization rates might decline going forward assuming that the proportion of active daily users coming from the US & Canada markets continues to decrease. It is natural to assume the more mature US & Canada region boasts a relatively higher level of user monetization rates as compared to international markets. Also, it is noteworthy that Roblox has delivered relatively flattish average bookings per monthly unique user in the past four years as per the chart below, implying that it might not have been successful in monetizing users in the past as well.

Roblox's Average Bookings Per Monthly Unique User

Roblox's Q4 2021 Results Presentation

Secondly, RBLX's valuations are not exactly cheap even after the recent stock price correction. The market currently values Roblox at consensus forward next twelve months' Enterprise Value-to-Revenue and EV/EBITDA multiples of 7.9 times and 41.1 times, respectively as perS&P Capital IQ data.

A $70 price target would translate into forward EV/EBITDA and Enterprise Value-to-Revenue of 12.5 times and 65.2 times, respectively based on my calculations. Roblox is unlikely to trade up to such lofty valuations, with market consensus expecting both the company's revenue growth rate (+15.3%) and EBITDA margin (+19.2%) to be relatively modest or below 20% in FY 2022.

Is RBLX Stock A Buy, Sell, Or Hold?

RBLX stock is a Hold. The medium-term outlook for the company is mixed. Roblox is working hard at aging up its user base and diversifying the company's geographic mix, and there have been encouraging signs as per its recent Q4 2021 results. But the slowing daily active users growth for Roblox's US & Canada markets is a key headwind, and RBLX's current valuations are not sufficiently attractive to warrant a Buy rating.$Roblox Corporation(RBLX)$