Roblox Corporation (NYSE:RBLX) hit a speed bump earlier this year, but the company appears in beast mode now. The mobile gaming company has a number of long-term catalysts for growth, including the move into advertising. My investment thesis remains ultra Bullish on the stock due to the consistent growth.
Android Speed Bump
Back along with Q1'24 earnings, Roblox highlighted some issues with low-end Android phones. Apparently, the company implemented a ton of new technology and some low-end phones saw a dip in performance, leading to less usage.
Roblox reported Hours Engaged for the quarter were up to 16.7 billion, but the growth rate dipped to only 15%. After getting over the tough comps the Covid boost, the company had successfully boosted growth back above 20% before the weak numbers for the March quarter.
On the Q1'24 earnings call, CEO David Baszucki discussed signs the company had resolved some of the technology problems with a traffic rebound in April as follows:
And I want to highlight, over the last -- really the last half of April and the first half of May, we have seen USA and Canada bookings, DAUs and hour growth come back to north of 20%.
The market didn't care, and the stock plunged from $40 to $30 overnight. Now, signs are emerging that Roblox has potentially boosted traffic far above prior growth rates reaching 28% recently.
The recent launch of the Despicable Me 4 Heist Obby game already has over 5 million visits. According to Variety, games on Roblox are helping to drive box office ticket sales in a sign of the influence of the mobile gaming platform.
All of the data points add up to Roblox reporting very solid Q2 traffic numbers. The big question will probably center around bookings growth. One can reasonably glean that low-end Android phones are outside the U.S. where monetization rates are vastly lower.
Either way, though, the Q1 revenue targets were missed by over $5 million. In addition, the guidance for Q2 bookings of $870 to $900 million missed the consensus estimates at $903 million, with full-year bookings slashed by $140 to $280 million to only $4.0 to $4.1 billion.
The updated traffic numbers suggest Roblox will more than recover the bookings weakness starting in April. The company even appeared to hint at the weak guidance being related to a desire to be conservative.
Massive Upside Potential
As Roblox reinforced in the Q1 earnings report, advertising is a huge opportunity going forward, but the story is still in 2025 and beyond. The consensus estimates though are far too low and digital advertising will be a driver for growth rates to accelerate in the future.
The consensus analysis estimates now have bookings only growing at the 15% clip over the next 3-years as follows:
Our view is that Roblox tops 20% growth rates (Investor Day 2023 guidance) during this period, with signs growth is already soaring back above 20%. If the mobile gaming company hits those growth rates, Roblox would produce the following yearly numbers after producing $3.52 billion in bookings during 2023.
- 2024 - $4.22 billion
- 2025 - $5.07 billion
- 2026 - $6.08 billion
The stock only has a market cap of $23 billion, so naturally Roblox becomes highly appealing, with bookings topping $5 and $6 billion in the next few years. While other investors are negative on the stock due to reported losses and stock-based compensation, the company is highly profitable due to how the bookings process works.
Even under the lowered bookings view, Roblox still guided to operating cash flows of up to $600 million for the year, with free cash flow of $350 to $420 million. The company has a current cash balance of $2.5 billion, possibly warranting the BoD to start repurchasing shares with the cash produced by the business.
At $36 now, Roblox only trades at ~4x EV/S targets for 2025. The stock is usually a nice bargain at this level and any signs the mobile gaming platform is able to hit our increased targets and Roblox won't stay at this rate.
Takeaway
The key investor takeaway is that Roblox remains a stock to own on weakness. The mobile gaming platform has a pattern of consistent growth and if the company reports Q2 growth jumping far above the 20% clip, Roblox is likely to rally back to the yearly highs above $45 and possibly higher as the company compounds strong growth.
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