On March 10, Roblox Corporation (RBLX) went public through a direct listing with a reference price set by the New York Stock Exchange (NYSE) of $45 per share. The stock rallied over 54% on its first day of trading to close at $69.50.
RBLX has remained resilient at higher levels and it seems likely that this positive momentum will sustain with key factors being its growth outlook and ability to generate positive cash flows.
Let’s take a deeper look into the company’s business model and the potential triggers for growth.
Company Overview And Business Model
Roblox is an online entertainment platform that connects over 37 million daily active users (DAU) to play, publish, and explore the 3D digital world.
The company’s platform depends largely on developers and creators. Users need to purchase a digital currency called Robux which can subsequently be used to shop for virtual clothing accessories and simulated gestures or emotes.
Roblox retains part of the transaction revenue and the rest gets shared between the developers who then have the option to either cash out their Robux by converting them into dollars, or reinvesting them into developer tools.
Roblox Is On A High Growth Trajectory
Strong top-line growth is a key reason why Roblox stock commands such a premium valuation. The company reported year-on-year revenue growth of 56% for FY2019, which accelerated to 81.7% in FY2020 for a total revenue of $924 million.
For the current year, Roblox has already guided for a decelerated revenue growth rate compared to last year of between 56% and 64%. However, this relatively lower rate of growth seems temporary with the company mentioning in their guidance that growth is expected to accelerate once again in FY2022.
The most important catalyst for growth is international expansion. For FY2020, 68% of the company’s bookings came from the United States and Canada. Roblox is now looking to speed up revenue growth through expansion in Asia and Europe.
In February 2019, Roblox signed an agreement with Songhua River Investment, an affiliate of Tencent Holdings (TCEHY). Through this JV, the company’s entertainment platform will operate in China under the name Luobulesi. China has a significantly bigger addressable market and if the platform gains traction, Roblox is well positioned to benefit from this venture.
In FY2020, the company launched Roblox Premium, a subscription service that is billed on a monthly basis. Users benefit by getting discounted Robux and other exclusive, in-experience benefits. From the company’s perspective, a growing number of subscribers provides clear revenue and cash flow visibility. The subscription model is likely to boost growth through a stream of recurring revenue.
Roblox is also looking at brands with whom it can create marketing partnerships. This is unlikely to have any meaningful impact on revenue in the foreseeable future, however, the company has already engaged with companies including Warner Bros, Netflix (NFLX) and Marvel to introduce branded content on the Roblox platform.
A High Cash Flow Business Model
From a financial perspective, Roblox has the ability to deliver healthy free cash flows with an asset-light business model. The company reported free cash flow of $14.5 million and $411.2 million, respectively, in the last two years. Sustained growth in daily active and paying users, together with a global expansion, is likely to translate into higher FCF.
It’s worth noting that the company has $1.4 billion in cash and equivalents and positive free cash flows would add to the company’s cash buffer. This is an important factor as the company has been aggressive in terms of inorganic growth.
In November 2020, the company acquired Imbellus, a developer of simulation-based cognitive assessments to measure human thought processes. Furthermore, in December 2020, Roblox acquired LoomAi, a company that specializes in real-time facial animation technology for 3D avatars.
Considering the company’s financial flexibility, it’s very likely that opportunistic acquisitions will be pursued. These acquisitions will add new features to the platform and help in boosting user engagement, thereby increasing the number of paying customers.
Wall Street Weighs In
Roblox has a Moderate Buy consensus rating based on a single analyst’s Buy recommendation. His price target of $85 per share implies that RBLX stock has around 37% upside potential from current levels over the next 12 months. (See Roblox stock analysis on TipRanks)
With plans for global expansion, Roblox Corporation is still in an early stage of growth. For the current year, the company expects daily active users to increase by 9% on a year-on-year basis, but once growth in China accelerates, the number of DAUs will increase at a faster rate.
Overall, Roblox Corporation has an attractive business model which has already demonstrated the ability to generate cash flows. RBLX stock therefore seems like an interesting proposition at current price levels.
Disclosure: On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.