Roblox Corporation (NYSE:
RBLX) recently delivered its annual accounts with impressive information about the growth in the number of users and developers.With beneficial guidance for the year 2024, I believe that the access to the virtual reality market, geographic diversification, and access to different platforms like PlayStation or Xbox may make net sales growth quite solid.Even considering risks from failed relationships with developers, inaccurate user growth figures, or lack of financing, RBLX does look cheap right now.
Roblox
Roblox Corporation’s business is based entirely on the digital platform it offers, wherein content creators interact with users interested in their content.Basically, it is a digital platform that has facilities for its participants, and offers a social network in which users interact.It is not a simple platform for content creation, it offers a series of digital tools for 3D modeling that allows immersion in an augmented reality experience.
In addition, the company offers monetization methods for creators through micro transactions of subscription to immersive experiences or digital accessories within them, the sale of plugins generated by other users to increase the tools within the content creation platform, and the sale of items for the avatars such as clothing among others.
This type of benefit is available only to those content creators who are part of the company’s program, selected monthly based on the activity and quality of the content created.In general terms, anyone can access the content creation platform for free without accessing its monetization benefits.
The management of the platform and business of this company are managed via a single segment, in which the Roblox Client platform for free content creation, Roblox Studio, which is used for free content creation, and Roblox Open Cloud, the infrastructure and series of services through which the company supports its operation, are offered.
I believe that the forecasts for 2024 are beneficial.Increases in deferred revenue are expected to be significant, and new bookings are expected.
The following is information from
a recent press release.
Balance Sheet: Significant Amount Of Deferred Revenue
Roblox reports a large amount of cash in hand and long term investments, which management can use for marketing expenses and development costs.The ratio of cash and cash equivalents/total assets is close to 10%, with short-term investments/total assets close to 24%.The ratio of long-term investments/total assets stands at about 16%.
Total assets, which are close to $6 billion, imply an asset/liability ratio close to 1x.I believe that the balance sheet appears quite healthy.
With regard to the total amount of liabilities, it is worth noting that Roblox does not need a lot of debt because of the total amount of deferred revenue.
Clients seem to pay in advance, which helps the company finance operations.The ratio of deferred revenue current portion/total assets stands at close to 39%, and ratio of long term deferred revenue/total assets is close to 22%.Long-term debt represents close to 16% of the total amount of assets, and long term debt stands at close to $1 billion.
Diversified Business Model, And International Expansion
Roblox appears to be geographically diversified.Users come from Europe, Asia Pacific, Canada, and other parts of the world.As a result, I believe that future net sales growth may be a bit less volatile than that of smaller peers.It is also worth noting that the company expects that the international expansion will bring net sales growth.
In my view, the expansion could also bring economies of scale and FCF margin growth.I included this assumption in my best case scenario.
We believe there is significant potential for us to grow the global reach of our Platform.We believe some of that will occur by the same organic, word of mouth user, creator, and developer growth that we have seen in markets like the U.S., Canada, and the United Kingdom.Source: 10-k
According to the last 10-k, approximately 64.8 million users paid even a minimum amount for access to one or more of the immersive experiences during 2023, and customers came through various platforms that are not limited only to the computer and mobile applications.Roblox has managed to insert its products into different traditional video game consoles in the market such as PlayStation or Xbox.
Needless to say, the increase in entertainment platforms and immersive reality experiences in recent years is significant, a trend in which Roblox participates, obtaining profits through the collection of commissions based on percentage for commercial activity within the platform and payment from creators and customers for the use of some specific features.
Different platforms offering the company’s content may be beneficial for net sales volatility.If one platform does not work for Roblox, management seems to have more options.
Good Relationship With Developers Will Most Likely Bring Net Sales Growth
According to the last annual report, Roblox continues to experience a significant increase in the number of developers and fees paid.
The company reports small developers, and also close to 750 developers making close to $100k or more.I believe that the strategies established to work with new developers are working successfully.
The company’s Roblox Studio and Roblox Open Cloud as well as other creator resources that are provided to developers seem to be effective for the generation of engagement and growth.
For the year ended December 31, 2023, over 12,000 developers.For the same period, there were over 3,500 developers and creators that earned the equivalent of $10,000 or more in Robux and over 750 developers and creators that earned the equivalent of $100,000 or more in Robux.
We provide appropriate support for all developers and creators to ensure engagement and growth in our developer and creator community.Source: 10-k
Exposure To The Virtual Reality Market Could Be A Net Sales Driver
The company appears to offer connection with Meta Quest as well as other VR hardware, which I believe could bring experience enhancement.
Given the impressive growth of the virtual reality market, which may grow at around 45.2% CAGR, I think that Roblox could see significant business growth.
With the Roblox Platform, developers can build an experience once and then expect that experience to operate consistently on all supported devices.Source: 10-k
The global virtual reality market is projected to grow exponentially, with a CAGR of 45.2%, from 16.67 billion USD in 2022 to 227.34 billion USD by 2029.Source:
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Subscription Business Model, And Other Marketplace Benefits
With many
experts out there noting the exponential growth of the subscription business model, I believe that it is worth giving a few details about the payment options offered by Roblox.Clients can pay via a subscription option, which is charged monthly or annually.
In addition, clients are offered discounted marketplace items and other Avatar items that enhance their digital experience.In sum, I believe that these payment options could also be a catalyst for net sales.
Users can generally purchase Robux in two ways: as one-time purchases or via Roblox Premium, a subscription service that is billed monthly or annually and includes discounted Robux, access to exclusive in-experience benefits, exclusive and discounted marketplace items and the ability to buy, sell, and trade certain Avatar items.Roblox accepts payments through app stores, credit cards, and prepaid cards.Source: 10-k
DCF Valuation Under My Best Case Scenario
Under my best case scenario, I included the assumptions obtained from previous cash flow statements.
I also added very conservative figures that are in line with previous financials.Some of the information I consulted is included in the chart below, however I invite readers to also have a look at previous 10-Qs and 10-ks.
First, with consolidated net loss of -$44 million, 2033 depreciation and amortization of about $1396 million, and stock-based compensation expense of $3524 million, I also assumed operating lease non-cash expense worth $55 million.
Besides, taking into account amortization of debt issuance costs worth $9 million, with changes in accounts receivable of -$772 million, I also included accounts payable worth -$170 million and prepaid expenses and other current assets close to -$5 million.
In addition, taking into account changes in developer exchange liability of $255 million and accrued expenses and other current liabilities worth $-5 million, I also assumed other long-term liability of $102 million and 2033 operating lease liabilities of about -$26 million,
Finally, by including deferred revenue of $1796 million and deferred cost of revenue worth -$265 million, I obtained CFO of $4 billion and 2033 FCF of $4.7 billion.
With the previous assumptions, I also included a
WACC of 6.9% and an exit multiple of close to 16x, which implied an enterprise value of $55 billion.If we also subtract net debt of $326 million, the implied fair price would stand at $86 per share.
DCF Valuation Under My Worst Case Scenario
Under my worst case scenario, net income would not increase as fast as in the previous case scenario.Besides, from 2024 to 2033, FCF would also grow, but FCF growth would be smaller than that in the best case scenario.
I included consolidated net income of about -$275 million, with the following adjustments to reconcile CFO.First, with 2033 depreciation and amortization worth $840 million, in addition to stock-based compensation expense of $3524 million, I included 2033 operating lease non-cash expenses close to $55 million.
Besides, I also assumed amortization of debt issuance costs worth $5 million, changes in accounts receivable worth -$460 million, accounts payable worth $-136 million, and prepaid expenses and other current assets of about -$5 million.Also, with developer exchange liabilities of $95 million, accrued expenses and other current liabilities of -$5 million, and other long-term liabilities of $62 million, I included operating lease liabilities close to -$26 million.
Additionally, my results included 2033 CFO of $4028 million, 2033 property and equipment of about -$1089 million, and 2033 FCF worth $2940 million.
With the previous cash flow projections, EV/FCF of 15x, and WACC of 10%, the implied enterprise value would be $25.2 billion, and the implied equity valuation would be about $24 billion.Finally, the fair price would be about $39 per share.
Competitors, And Risks
The competition is divided in terms of attracting new customers and quality content creators.In both cases, the greatest competition comes from globally recognized technology and content creation companies, such as YouTube and Instagram among others, as well as entertainment social media platforms such as Disney (
DIS), Comecast, Netflix ( NFLX), Meta ( META), Electronic Arts ( EA), Take-Two ( TTWO), and Epic Games.
In general terms, it is important to know that the company has experienced exponential growth in recent years, and there is no certainty that this growth will be similar in the short term.
On the other hand, the company largely depends on the services offered by third parties, in terms of the devices for accessing its platforms, as well as the content creators and the quality of their content.It is essential for this reason that the company stays up to date with consumer trends to achieve greater audience engagement.In this sense, it is worth noting that the Lua programming language through which the content is created within the platform is highly attractive and pioneering in its ease of use, and the appearance of other similar languages could generate a decrease in use of the tools within the platform.
There are also chances that Roblox may not be able to obtain sufficient capital to pay its debt obligations as well as coexist with other risks related to the regulation of digital markets and the collection of user data.
I also believe that certain information given about the number of users could include overstatements.If the number of users is lower than what the company reports, investors may not trust the growth numbers offered by the company.In this regard, have a look at the following lines from the most recent annual report, which was issued in February 2024.
Because DAUs measure account activity and an individual user may actively use our platform within a particular day on multiple accounts for which that individual registered, our DAUs are not a measure of unique individuals accessing Roblox.
Additionally, if undetected, fraud and unauthorized access to our platform may contribute, from time to time, to an overstatement of DAUs.In many cases, fraudulent accounts are created by bots to inflate user activity for a particular developer’s content on our platform, thus making the developer’s experience or other content appear more popular than it really is.We strive to detect and minimize fraud and unauthorized access to our platform.
Source: 10-k
My Takeaway
Roblox recently delivered its annual accounts with impressive information about the number of users and developers.Equipped with a subscription model, offering exposure to the virtual reality market, and with beneficial 2024 guidance, Roblox is certainly a must-follow stock for tech investors.There are many risks out there coming from failed growth, initiatives, inaccurate user growth figures, or problems with content creators.With that, I do believe that there is a lot of
upside potential in the stock price..
