Roblox Corporation Is A Buy In Our World

Aug. 26, 2021 1:35 PM ETRoblox Corporation (RBLX)20 Comments

Summary

  • Roblox Corporation operates an immersive gaming platform, a toolkit where developers can create and users live in virtual worlds.
  • This concept is as old as a field - in computing you can trace the roots of this notion back to text-based Multi-User Dungeons from the 1970s.
  • The notion of immersive infinite worlds is becoming common in software - Slack, for instance, was conceived of as an "infinite game".
  • Roblox has exceptionally strong financials and its valuation is modest in the light of its growth and margins - we rate the name at Buy on a long term basis.
  • This idea was discussed in more depth with members of my private investing community, Cestrian Fundamentals. Learn More »

vintage overhead view of a dungeons and dragons equipment
Esther Derksen/iStock via Getty Images

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Nothing New Under The Sun

Roblox Corporation (NYSE:RBLX) is a becoming-famous if not becoming-infamous stock. The company provides an integrated development environment and runtime for relatively low-tech games; so far, so meh. What interests us is the immersive nature of the world it offers and in particular the use of its own internal tokens of value, the creatively titled Robux. As a house we have an expanding interest in 'metaverse' stocks because we believe strongly that the retreat into worlds virtual is likely to be a progressive matter. Since the world physical isn't getting any easier, and since plenty of folks are finding ways to generate value-tokens in virtual worlds that can be turned into rather expensive physical things like houses, we think the attraction of the metaverse will persist and grow. If you think this stuff is all Gen Z nonsense we would ask you to note that Visa just paid $150k worth of Ethereum for a cyberpunk NFT which is something that used to be called a bitmap image and was free. (Gen Z folks, feel free to pile in here with comments starting "you just don't understand Grandpa, it's nothing like a bitmap").

If you're interested in RBLX we would encourage you to read the many notes already published on Seeking Alpha about the stock. Most are neutral or negative and not without good reason. You can read them all here. They are all well-argued pieces and since this is a stock ergo anything could happen, who are we to say they are wrong. For our money though, we think this is a Buy and indeed we have bought a little - just a little - in staff personal accounts. The stock has run up recently and it's too early in its life as a traded instrument to use any technical analysis. Fundamental valuation is low in our view as a function of its growth and margins, so we don't mind owning a small starter position in order to then see what happens - our intent is to build up a bigger allocation as time goes by.

Over and above our working thesis that people will spend more time in the metaverse and less time in the physical world, the logic for us owning RBLX is very simple - the numbers. The fundamentals are exceptionally strong.

Roblox Financials

Roblox Cash and Debt

Source: Company SEC filings, YCharts.com, Cestrian Analysis

The gaps are because this is a new listing - we'll fill them in as successive SEC reports get filed with the missing data.

Now - the point here - 40% unlevered pre-tax free cashflow margins at 127% YoY growth and 1.45x TTM revenue already in the bag in the form of prepaid, yet to be recognized deferred revenue? That doesn't happen often.

And when you have to pay "only" 35x TTM revenue for that - which by the way is only - no inverted commas required - 88x TTM unlevered pretax FCF?

Roblox Stock Valuation

Source: Company SEC filings, YCharts.com, Cestrian Analysis

That, in our own virtual world, looks like a Buy.

We will be covering Roblox and would guess that the stock will be on something of a magical mystery tour for awhile but if we had to call it, we'd say this can be a winner. So, rating, Buy on a long term basis, there will probably be a better day than today to buy big, since the stock this early in its life is likely to be very volatile and may well present deep red moments during which to add to positions.

Cestrian Capital Research, Inc - 26 August 2021.

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Disclosure: I/we have a beneficial long position in the shares of RBLX either through stock ownership, options, or other derivatives. Business relationship disclosure: See disclaimer text at the top of this note.

Additional disclosure: Cestrian Capital Research, Inc staff personal account(s) hold long position(s) in RBLX.

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