To The Moon

Investment Thesis

Roblox Corporation (NYSE:RBLX) had lost 78.8% of its value, given the continuous downwards slide since November 2021. Since other Metaverse related stocks, including Meta (FB) and Matterport (MTTR), havealso massively declined in the past six months, it is apparent that the party is over for now, though the former is mainly attributed to its reduced profitability from the Apple (AAPL)'s headwinds. In addition, stock recovery will not be soon, given its lack of profitability, the overly bearish market, and global macro conditions.

Nonetheless, given its massive potential in the Metaverse, the RBLX stock remains a speculative long-term play for those with excess capital.

RBLX Proved That The Metaverse Hype Train Had Stalled (For Now)

RBLX Revenues, Net Income, Gross & Net Income Margin

S&P Capital IQ

In FQ1'22, RBLX reported revenues of $537.1M, representing a decline of 5.5% QoQ and an increase of 38.7% YoY. Despite the YoY improvement in its gross margin, from 19.6% in FQ1'21 to 21% in FQ1'22, it is apparent that the company is overspending on operational expenses, given that it reported widening net losses of -$160.2M for the quarter. It is also evident that despite RBLX's massive popularity, the company has yet to report profitability with -29.8% of net income margins by FQ1'22.

RBLX R&D, Selling/ Marketing, and General/ Administrative Expense

S&P Capital IQ

As evident from the charts, RBLX spent a total of $818.12M in operational expenses in FY2021, representing 166% of its net losses for the year. In addition, the company seems to be growing its expenses in the last twelve months, with expenses of $264.63M in FQ1'22 alone, mainly attributed to the R&D segment at 67.1%.

RBLX Cash/ Equivalents, FCF, and FCF Margins

S&P Capital IQ

It is also evident that RBLX is not able to fully finance its operations for now, given that it only reported Free Cash Flows (FCF) of $565.84M in FY2021. However, given that it has a war chest of $3.13B of cash and equivalents on its balance sheet as of FQ1'22, the company may still weather the incoming storm in the short term. Nonetheless, assuming the bookings and user growth continue to fall, RBLX could see reduced FCF profitability moving forward, thereby implicating its future growth.

RBLX's Branding Partnership

RBLX and Axios

However, there might be light at the end of the tunnel after all, since some of RBLX's efforts are paying off, withGuccisetting up its permanent digital town on its platform. The Gucci Town will feature digital shops selling unique RBLX-only collectibles, such as 3D bags and garments, while also including Gucci-inspired games, such as Tile Takeover or Flashlight Tag. Furthermore, certain Web3-based items, including NFTs, would also be available on Gucci Town's virtual shelves. As a result, we may see RBLX adopted by many other luxury brands as part of an immersive social and world-building virtual platform.

In addition, RBLX also recently announced its partnership withAkili, the pioneer of medical treatments with breakthrough game technologies. The innovative integration of prescription video game treatments for ADHD patients in RBLX's virtual platform could potentially lead to new revenue avenues for the latter moving forward. Given that the EndeavorRx® is also US FDA approved, it is apparent that RBLX's real potential has yet to be fully uncovered, thereby giving the stock a speculative premium for the long-term. Craig Donato, Chief Business Officer of Roblox, said:

Akili has captured our imagination with its prescription treatment for children with ADHD delivered through an action video game experience and shares our vision and enthusiasm for what's possible through interactive, digital experiences. We're proud to help them as they lead the effort to realize new potential in the field of medicine. (Akili)

RBLX's Profitability Is Not Happening Anytime Soon

RBLX Projected Revenue and Net Income

S&P Capital IQ

Since our last article in April 2022, RBLX's growth has been downgraded by consensus estimates. Over the next four years, its revenue is expected to grow at a CAGR of 22.28%, instead of the original 28.88%. Since it is a further downgrade from our February 2022 analysis at a CAGR of 32.29%, it is apparent that consensus estimates are no longer as bullish on its growth prospects. In addition, RBLX's projected net income profitability seemed less likely now, with a widening estimated net loss of -31.2% at -$0.84B in FY2025, compared to -$0.64B from our April 2022 analysis.

Furthermore, RBLX is expected to report revenues of $2.83B and net income of -$0.68B for FY2022, representing a YoY increase of 48.1% though declining profitability by -31.3%. These numbers are troubling since they also downgraded from our previous February 2021 analysis by -15.2%. As a result, RBLX investors should be concerned about its long-term prospects, given the decelerating bookings and user growth, expanding operational costs, reduced FCF profitability, and increasing SBC expenses.

RBLX Total Debt and Share Dilution

S&P Capital IQ

As a result, it is evident that RBLX would need to continue to rely on debt and Share-Based Compensation (SBC) for its operations, given the lack of net income and potentially, reduced FCF profitability moving forward. In the last four quarters alone, the company had increased its total debt leveraged by over fivefold. Furthermore, its SBC expenses in FQ1'22 had also increased by 221% YoY to $112.29M. Assuming a similar rate moving forward, we may expect RBLX to incur up to $450M in SBC expenses for FY2022. As a result, investors who had bought in during IPO may also see their shares diluted for some time to come.

RBLX Share-Based Compensation

Seeking Alpha

In the meantime, we encourage you to read our previous article on RBLX, which would help you better understand its position and market opportunities.

• Meta Vs.Roblox: The Battle Of Metaverse Commission Rates - 47.5% Vs. 72%
• Roblox: Aggressively Diversifying Its User Demographics

So, Is RBLX Stock A Buy, Sell, or Hold?

RBLX 1Y EV/Revenue and P/E Valuations

RBLX is currently trading at an EV/NTM Revenue of 5.41x and NTM P/E of -26.45x, lower than its 1Y mean of 13.76x and -60.56x, respectively. The stock is also trading at $29.94 on 31 May 2022, down 78.8% from its 52 weeks high of $141.60 and nearing its 52 weeks low of $21.65.

RBLX 1Y Stock Price

Given the reality check in the current bearish market and a lower likelihood of net income profitability, we are downgrading the RBLX stock to hold for those who have yet to buy in. It is unlikely that the company will break out of this rut in the near and intermediate-term, given that the Metaverse hype train has stalled for now. Even Meta hadguided for lowered investmentsfor its Reality Labs moving forward, also known as Metaverse, given the temporary headwinds and macro issues faced by the social media and advertising giant.

In addition, assuming that RBLX continues its similar under performance in the next few quarters, we may also expect the stock to further retrace to new lows. Nonetheless, given its thriving Metaverse platform, multiple future adaptations, and potentially successful aging up of its existing users, the stock could reverse its position in the long term. Thus, RBLX is suitable only for speculative investors with excess capital and overmuch patience.

Therefore, weare downgrading RBLX stock as a Hold for now.