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Roblox: This Stock Has An Exciting Future - Here's Why

seekingalpha2021-04-23

Summary Roblox has the potential to successfully expand into verticals outside of gaming. We reverse engineered a discounted cash flow model to determine the required growth rate of FCF to justify ...

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Pale
·2021-04-23
Might dip into this. Too bad Mojang is under microsoft. Minecraft is more popular.
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DesmondChin
·2021-04-23
Haha, I download this game but I don't know how it works
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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nRoblox: This Stock Has An Exciting Future - Here's Why\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-04-23 15:31 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4420768-roblox-this-stock-exciting-future-why><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Summary\n\nRoblox has the potential to successfully expand into verticals outside of gaming.\nWe reverse engineered a discounted cash flow model to determine the required growth rate of FCF to justify ...</p>\n\n<a href=\"https://seekingalpha.com/article/4420768-roblox-this-stock-exciting-future-why\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"RBLX","symbol_name":"Roblox Corporation","start_time":0,"source_url":"https://seekingalpha.com/article/4420768-roblox-this-stock-exciting-future-why","article_id":"1100215362","we_media_id":null,"thumbnails":[],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=1100215362","pubTimestamp":1619163068,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Summary\n\nRoblox has the potential to successfully expand into verticals outside of gaming.\nWe revers","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"RBLX":"Roblox Corporation"},"translate_title":"Roblox：这只股票有一个激动人心的未来--这是为什么","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"RBLX":0.9},"content_text":"Summary\n\nRoblox has the potential to successfully expand into verticals outside of gaming.\nWe reverse engineered a discounted cash flow model to determine the required growth rate of FCF to justify the current price.\nAlthough we like the company, we will be watching from the sidelines.\n\nPhoto by Ian Tuttle/Getty Images Entertainment via Getty Images\nWhether we like it or not, the world is becoming more digital. Shopping, working, and socializing have seen a permanent shift to online mediums over the course of the past decade and have become more deeply integrated with our lives with each passing year. Just like social media was used by many to build the \"perfect persona\" in the last decade, the metaverse seems like the logical next step for this decade. This seems to be the case with younger age groups.\nAt the forefront of the metaverse stands Roblox Corporation (RBLX). A metaverse is a virtual-reality space in which users can interact with a computer-generated environment and other users. We believe that the Roblox platform creates exciting new opportunities not only for game developers, but also advertisers, entertainers, and educators.\nThe potential for multiple verticals, combined with the platform's super high engagement and strong free cash flow, makes Roblox a very interesting company for investors with a long time horizon.\nIndustry Analysis\nRoblox operates in the gaming industry which was valued at USD 162.32 billion globally in 2020 and is expected to grow at 10.5% CAGR between 2021 and 2026. Although the industry as a whole is expected to grow, it is not growing evenly in each subcategory.\n\nAs we can see from this image, the lion's share of the growth has been generated by mobile gaming, with some categories seeing declines. Fortunately, Roblox is platform agnostic meaning it can run well across multiple platforms. Nonetheless, understanding that the most growth is coming from mobile justifies management's current main focus on this segment.\nRoblox also supports virtual reality. Although a relatively small segment at the moment valued at USD 15.81 billion, it is expected to have a CAGR of 18% from 2021 to 2028. This equates to an estimated market size of USD 59.43 billion by 2028 which is not small at all.\nPeer Comparison\nLet's compare Roblox to similar stocks. The companies we will be comparing RBLX to are: Activision Blizzard, Inc. (ATVI), Electronic Arts Inc. (EA), Take-Two Interactive Software, Inc. (TTWO), Unity Software Inc. (U), and Zynga Inc. (ZNGA).\nWe compared the following metrics: market cap, cash return on invested capital, EBITDA margins, forecasted EBITDA margins (for next year), EV/EBITDA, and Debt/Equity.\nHere's what we got:\nSource: Finbox\nRBLX currently has the highest cash return on invested capital at 450%. This is partly because its total equity is so low ($112M). However, this number is likely going to come down in the near future because the pro-forma equity (according to page 73 of the prospectus) is expected to be about $647M, which puts pressure on this metric. Regardless, we still expect RBLX to keep its CROIC higher than most, if not all its peers in the near future.\nRBLX's EBITDA margins are currently negative, but are forecasted to be 43.1%, according to Finbox. This puts it ahead of everything except for ATVI, which is forecasted to have 43.9% margins.\nFinally, RBLX has no debt on its balance sheet, although none of its peers seem to have a debt problem either.\nDemographics\nRoblox is known to be very popular with younger audiences, more specifically, those aged 13 and younger. A major criticism about the company is that only kids use the platform and that they will quickly grow out of Roblox. In addition, they claim that kids can't or don't spend any money resulting in the company not being able to see long-term success. However, those who make that criticism are ignoring the facts.\nThe company has done a great job over the years expanding to older age groups. Those aged 13 and over now make up over 43% of Roblox users. In fact, one of the fastest-growing demographics of Roblox users are those aged between 17 and 24. Management has attributed this to significant visual improvements. The platform is much more photorealistic today than it was 5 or 10 years ago and Roblox intends to continue improving. Furthermore, the improving visuals and capabilities of the platform have demonstrated to be effective at retaining users.\nSource: Roblox S-1\nAs we can see from the image above, none of these cohorts show indication of flattening. As a result, this refutes the claim that users will get bored of it easily.\nIt's also important to point out that kids have tremendous influence on spending, so much so that there's a marketing term for it - \"Pester Power\". Alternatively known as \"the nag factor\", it refers to the tendency of children to unrelentingly request advertised items. Thus, for those kids who love Roblox and really want to purchase some Robux (the platform's currency), it is very likely that a good number of parents would give in. This would be especially true if kids are playing regularly with friends because parents don't want their kids to feel left out.\nCompetitive Advantages\nRoblox has quite a few competitive advantages. To begin with, the platform is very sticky with users averaging 2.6 hours a day in 2020. However, COVID-19 definitely gave them a boost and management expects engagement to drop a bit in 2021 to roughly about 2.3 hours a day. Despite the slight drop, 2.3 hours is still impressive and can continue to increase over time.\nAlthough Roblox at the current moment is mostly a gaming platform, the management team has stressed that the platform was designed for people to express themselves in a new and unique way. If there's is one thing we as a society has learned in the past 10 years with social media, it's that people love to express themselves. If people can become obsessed with posting pictures of themselves or tweeting about mundane activities, it's not hard to picture the younger generations becoming obsessed with the metaverse. As the technology gets better and platforms such as virtual reality become increasingly more powerful, we could see Roblox become an increasingly important part of daily life.\nA benefit to the high levels of engagement and the ability for users to express themselves is that it leads to a high level of word of mouth marketing. People seem to love sharing what they do on the platform and the games they play. A quick YouTube search will show just how popular these Roblox videos are.\nWord of mouth marketing is by far the best form of advertising because it doesn't cost anything. Users love a product so much that they just have to talk about it with others. This allows the company to focus more on research and development and less on marketing. As a result, users continue to see improving experiences which increases how much they talk about the platform and increases the number of users creating a virtuous cycle.\nFurthermore, Roblox makes things super easy for developers. To begin with, developers have free and unlimited access to servers and storage. This means that new developers who are starting out can do so with no financial risks. Having tens or hundreds of thousands of users daily could get pricey for a new developer if relying on third party servers or storage. This could be an issue if the game is great at monetizing its users. Other important tools provided include international compliance, translations, payments, customer support and most importantly, a large audience.\nAn easy-to-use platform draws in more developers which leads to more content. This takes the pressure off of Roblox to develop the games itself, allowing it to reinvest into improving the overall experience of the platform.\nLong-Term Growth Catalysts\nThere are many exciting revenue streams that Roblox can choose to pursue in addition to gaming. One of the most interesting verticals the company plans to pursue is advertising. However, unlike the intrusive ads we're used to seeing on social media, YouTube or television, the company has a totally different vision. Roblox is planning to only allow brands who can create an immersive experience for users through a brand inspired digital world.\nThe company began experimenting with this idea and partnered with DC and Warner Bros in 2020 to promote Wonder Woman. They created a mini-world where players can explore Wonder Woman's home island of Themyscira and experience her stories on the Roblox platform through mini games and other experiences. This strategy definitely has a much better impact than traditional TV ads or promoted social media posts. This is the metaverse equivalent of a company page on Facebook (FB). Other big companies such as Netflix, Inc. (NFLX), NIKE, Inc. (NKE) and Gucci are also building worlds on Roblox.\nWe believe this to be a huge opportunity for both Roblox and the brands that pursue this strategy. It's especially a great opportunity content heavy industries such as the music industry. For example, Lil Nas X held a fully-virtual concert on Roblox which was visited 33 million times. Ava Max also held a Roblox event where 1.2 million users attended her album launch party.\nIn addition, this could inevitably lead to a new form of e-commerce. Roblox has the potential to become very prevalent in this space especially as the virtual reality industry continues to grow and the technology improves. The more photorealistic Roblox becomes, the greater the opportunity for e-commerce to become huge on the platform.\nLastly, we believe that management's vision of using Roblox for education is another potentially great opportunity. As an example, instead of talking about what happened in ancient Rome or showing videos, a 3-D world could be created to allow students to experience it. Students would also be much more engaged because they would be able to play games which could potentially allow them to retain more information.\nSome of these catalysts are still quite far away for now, but there's very little reason to believe that the company won't be able to execute on these plans.\nRoblox is Founder-Led\nAs stated in many of our other articles, we see it as a bonus when a company is operated by its founder, especially since founder-led stocks have been proven to significantly outperformthe market over time. Roblox is one of those companies. Founder David Baszucki owns a 10.12% stake in the company according to the simplywall.st image below.\n\nOther board members also have smaller stakes in the company as well. Overall, it looks like the founder and board of directors are aligned with shareholders' interests.\nRisks\nWe believe the biggest error regarding Roblox is focusing too much attention on the income statement. A big reason for this is because of the way the company recognizes its revenue:\nSource: Prospectus\nSince the company has to recognize the sales of \"durable items\" on its platform over the course of 23 months (the average life of a paying user), changes in its business operations would be delayed and in extreme cases by a material amount.\nAnyone who has read the book Financial Shenanigans, by Howard M. Schilit, understands just how misleading the income statement can be. The book referenced free cash flow and free cash flow after acquisitions (for companies that are serial acquirers) as the metrics that painted the clearest picture when analyzing companies that were major financial frauds. Companies like Enron and Valeant Pharmaceuticals, now Bausch Health Companies Inc. (BHC), could have been avoided by simply looking at those 2 metrics.\nUnlike these 2 companies, Roblox is the total opposite. The income statement greatly understates the operations of the company. The deferred revenue that the company has to recognize over 23 months are cash payments it receives from the purchase of Robux that arenot refundable. As a result, it shows up as cash from operations instead. When deducting capital expenditures, the company is left with strong free cash flow.\nIn addition, management has said that the users who buy Robux are quick to spend them on the platform, usually within 72 hours. It's also important to note that the percentage of deferred revenue would increase if the lifetime of paying users increased. Think about how misleading this is. As the company improves the lifetime of paying users, it will have to increase the amount of time it takes to recognize the revenue even though the Robux have been spent and are non-refundable. The income statement will actually punish the company for becoming better.\nThus it is best for investors to ignore the income statement and focus primarily on free cash flow or else risk completely misinterpreting the company's operating success.\nValuation\nSince the GAAP income statement does not paint the full picture with Roblox and can lead to delayed and inaccurate operating results due to the revenue recognition, it doesn't make any sense to use earnings or sales multiples. The cash flow statement paints a much better picture of the company's actual performance and as a result it is more appropriate to use a DCF.\nHowever, as Roblox is a young company in an accelerated growth phase, coming up with a reasonably accurate DCF model is close to impossible. Thus, we will reverse engineer a DCF to figure out what the required growth rate of the company's free cash flow is in order to justify the current valuation.\nThe answer we arrived at was 32.91% as calculated below:\nSource: Author\nAssumptions:\n\n2021 FCF based on management guidance of $330 million cash from operations adjusted for the one-time expense of $50 million minus analyst consensus for capex of $165 million\nBeta of 0.995 used by simplywall.st\nRisk-free rate of 1.75%\nEquity risk premium 5.2% used by simplywall.st\nDiscount rate of 6.92%\nPerpetual growth of 2.5%\nHalf-year convention used\n\nTherefore, as an investor, you need to decide for yourself whether or not the company can achieve this kind of growth in free cash flow when buying at these prices.\nHowever, since discounted cash flows are sensitive to changes in discount rates, we have created the chart below to demonstrate the required growth at different prices and discount rates as a quick cheat sheet for valuing Roblox:\nSource: Author\nThese are the CAGR growth rates the company would need to achieve over the next 10 years.\nConclusion\nWe love the idea of Roblox and the vision of the management team. We believe there is great potential to monetize the platform in a variety of innovative ways. However, it is hard to determine at the moment just how fast the free cash flows will be able to grow.\nIn addition, we believe that the stock will be volatile in the near future which could possibly present an opportunity to buy it at a better price. For now, we will watch from the sidelines and potentially take action on any large dips.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":372934245,"gmtCreate":1619167035387,"gmtModify":1704720665889,"author":{"id":"3581566156246512","authorId":"3581566156246512","name":"Pale","avatar":"https://static.tigerbbs.com/08488aa5ed1cf0969579c9df5338208d","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3581566156246512","authorIdStr":"3581566156246512"},"htmlText":"Might dip into this. Too bad Mojang is under microsoft. Minecraft is more popular.","listText":"Might dip into this. Too bad Mojang is under microsoft. Minecraft is more popular.","text":"Might dip into this. Too bad Mojang is under microsoft. Minecraft is more popular.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/372934245","repostId":1100215362,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":372076355,"gmtCreate":1619164438177,"gmtModify":1704720619293,"author":{"id":"3578983795474363","authorId":"3578983795474363","name":"DesmondChin","avatar":"https://static.tigerbbs.com/b90cb6b6a6c328ac8d02a829e5e7c835","vip":1,"hat":"https://static.tigerbbs.com/46b6808e1ba3716fb9c53339adffa3c5","crmLevel":3,"crmLevelSwitch":1,"idStr":"3578983795474363","authorIdStr":"3578983795474363"},"htmlText":"Haha, I download this game but I don't know how it works","listText":"Haha, I download this game but I don't know how it works","text":"Haha, I download this game but I don't know how it works","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/372076355","repostId":1100215362,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":6,"commentSize":2,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}