Roblox: Dip Buying (Rating Upgrade) (NYSE:RBLX)

The biggest issue facing Roblox Corporation (NYSE:RBLX) entering Q2 2023 earnings was the elevated stock valuation. The mobile gaming platform is back to growth mode following the Covid volatility, but the market is now too worried about elevated investments in the future. My investment thesis is far more Bullish on the stock after the 20% dip to $30 following RBLX Q2 earnings.

Booming Numbers

For the last couple of years, Roblox has maintained strong growth in key user totals and engagement, but revenues and bookings struggled due to lapping aggressive spending during Covid. The company is now back to 20% growth.

For Q2’23 earnings, Roblox reported these key metrics:

• Bookings were $780.7 million, up 22% YoY, and also up 22% YoY on a constant currency basis.
• Average Daily Active Users (“DAUs”) were 65.5 million, up 25% YoY.
• Average monthly unique payers were 13.5 million, up 19% YoY.
• Hours engaged were 14.0 billion, up 24% YoY.
• Average bookings per DAU (“ABPDAU”) was $11.92, down 3% YoY, and down 2% YoY on a constant currency basis.
• Average bookings per monthly unique payer was $19.32, up 3% YoY, and also up 3% YoY on a constant currency basis.

In essence, Roblox is now topping 20% growth rates in key financial metrics and user engagement. Hours engaged were actually up 24% in a very positive sign the gaming platform continues to attract users to actually play games on the platform.

The monetization metrics aren’t as impressive with the user growth coming outside the U.S. The ROW segment grew 32% to 17.7 million DAUs while US & Canada DAUs only grew 15% to 14.2 million.

The shift to areas like APAC and ROW will continue to impact the ability of Roblox to grow the average bookings metrics. The focus should shift more towards the total bookings numbers with Q2 bookings at $781 million setting up for record numbers in the far more important Q3/Q4 quarters when ad spending jumps.

Spending Spree

The prime reason the stock plunged was due to aggressive spending on the platform to drive growth in 2024 and beyond. Roblox reported net cash from operations down to only $28 million in the quarter, slightly up from the $27 million reported last Q2.

The company has hired a lot of headcount in the last year to drive a move into the Metaverse via AR/VR headsets, AI content creations and subscriptions, amongst other platform plans. Roblox now has ~2,400 employees, up 500 YoY, with personnel expenses at 26% of bookings. The amount is up from only 22% last Q2.

In the Q2 ’23 shareholder letter, the company reinforced plans to generate operating leverage going forward as follows:

With a return to bookings growth of over 20%, we shared our goal of generating operating leverage in both compensation costs and infrastructure and trust & safety. Specifically, we noted that we expect the growth rate in bookings to exceed the growth rate in infrastructure and trust & safety costs starting in the second half of 2023 and through the end of 2025. We also said that we expect the bookings growth rate to exceed the growth rate in compensation costs starting in Q1 2024 and throughout 2024 and 2025, resulting in operating leverage.

As usual, the market is over extrapolating the spending levels here. Roblox announced this plan to spend in 2023 leading to operating leverage in 2024 and 2025.

BTIG forecasts 2024 bookings reaching $4.3 billion. Even just 15% growth in bookings leads to annual growth in the $600 million range allowing Roblox to easily absorb the higher expenses in 2023.

The stock turns appealing when the forward EV/S multiple dips towards 5x. Roblox has ~$2 billion in net cash to easily afford these short-term investments in the business.

The initial big selloff would support a bullish valuation on the stock, but investors should definitely wait at least the traditional 3 days to acquire the stock. The market may require Roblox to prove operating leverage will occur in future quarters before buying the stock going forward.

Takeaway

The key investor takeaway is that Roblox is far more appealing now after reporting growth metrics topping 20% and the stock falling 20% in response to higher spending. The gaming platform has massive opportunities ahead in the Metaverse and AI to not aggressively spend.

The stock is appealing with the forward EV/S multiple dipping towards 5x, though investors are advised to patiently wait to enter the stock.