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Is Roblox Still a Buy in Q2 2022?

PUBLISHED Apr 27, 2022, 2:41:52 PM        SHARE

img
imgChaster Johnson

Is RBLX Stock A Buy, Sell, or Hold?

I'm still calling Roblox a Buy. Many of my points made in my last article discussing investor day still resonate today.

As of today, anybody can:

  • join Roblox for free
  • play on thousands of different community made games
  • play with thousands of other people around the world in the same experience.

When I buy stuff at Target, my son still asks for "Robux" gift cards. Its consistently the item he asks for... every time (its always a no. That's a rabbit hole I'm avoiding).

Nope, put the Robux back!

Roblox has a tremendous moat. Everyone under the age of thirteen has already chosen their social media platform and that's Roblox.

With that said, let's analyze the headlines that shook Roblox stock in the last quarter.

Why Did Roblox Stock Drop?

Umm... the Whole Market Fell Last Quarter

The S&P 500 has fallen nearly 13% year to date. That's going to affect every company in the market. Since Roblox is a technology stock, it will tend to have a higher beta. This means that it will rise higher when the market rises, but also fall further when the market falls.

But that only tells part of the story. While the general market has fallen 13%, Roblox has fallen almost 68% year to date. That meteoric collapse will shake the most bullish investor out of apathy.

CEO Compensation

In early April, multiple media outlets reported on Roblox's CEO's new compensation plan after it was filed with the SEC. CEO David Baszucki's pay compensation jumped to over $200 Million!

I am always the first to rail against high CEO compensation. It is always worrisome to give a CEO a high compensation. You expect them to deliver.

What's interesting is that David's base salary dropped from $500k in 2020 to just $136k in 2021. And now it's effectively $0. What the CEO received is compensation in restricted shares and options.

Reported by gamesindustry.biz, reuters spotted a proxy statement with the following reward structure:

  • The first goal is to reach $165 per share by March 2, 2023
  • $375 per share by March 2, 2026
  • If the stock price does not pass $165 for a consecutive 90-day period before March 2, 2028, Baszucki will receive nothing from his award.

This is a much better sign. A lot of this compensation does not mature for years, which gives the CEO time to focus on company growth.

My Impression This compensation package looks to be aligned with investors, so I am neutral on this headline. I think that if it wasn't locked up, I would have raised an alarm. To make this compensation worthwhile, David Baszucki needs to get the world to adopt Roblox, and that is no small feat.

These share price goals are absolutely ambitious. If he meets these objectives investors win as well.

RBLX Stock Key Metrics

Roblox's key metrics: user hours on platform fell in Q4 2021 while revenue continued to rise. The consensus in Q1 2022 was that user hours fell because of the end of Covid restrictions and the return of kids to school.

Roblox Users Hours Engaged

My Impression The logic behind this is sound. I'm neutral on these headlines. If you're investing in Roblox for the long term, you're going to have to ignore short term bumps in the road. Roblox was started in 2006, so it has hit quite a few bumps. However, you should be very critical of the results in the next quarterly update coming soon in May.

Regardless of the near term drop, Roblox is engaged in a world wide market expansion. This expansion should compensate for any loss of users due to the Covid lock down. If the metrics fall further in the next report, that may make me rethink my position in Roblox.

Roblox Revenue Q4 2022

RBLX Stock Price

Goldman Sachs Downgrade

In February, Goldman Sachs downgraded Roblox from a buy to neutral. However, the overall sentiment was upbeat. Investing.com quoted the analyst saying:

“We still see Roblox as growing above industry levels in terms of revenue with a strong long term margin potential. We expect Roblox to grow bookings through DAU expansion, from $2.7bn in 2021 to $6bn by 2026, representing a 17% 5 year CAGR. A mixture of putting the near term headwinds behind the company coupled with continued strong management execution could drive the share’s risk/reward to be more constructive.”

My Impression This is a reasonable analysis. However, the analysis is seeing a large "fog of war" ahead. I believe this because the analyst changed his price target from $108 to $50 per share. This downgrade is huge, but looks very reasonable for 2022.

Deutshe Bank

In mid-March, Deutshe Bank analyst Benjamin Black set a buy rating with a price target of $60 per share.

In the investors.com article, it's noted that Black called Roblox "the next platform play". He referenced Roblox's competitive advantage (what I call their moat) due to a large player base and developer community.

My Impression I'm bullish on these points. In investing, confirmation bias is dangerous, but Black's points agree with the points I covered in my December 2021 analysis.

Is Roblox Stock Expected To Rise Again?

$13 Trillion dollar market

If there is one theme for 2022 echoed in financial media, it's metaverse. Citi Bank is calling the metaverse a $13 Trillion dollar market by 2030. JPMorgan and Goldman Sachs see an $8 Trillion industry.

The Citi report did make an interesting note about computation power. To run the metaverse as envisioned, you need 1,000 times today's current power.

Chipotle Advertising on Roblox

In early April, Chipotle announced its new Roblox experience, Chipotle Burrito Builder

Chipotle Burrito Builder

As of April 26th 2022, the experience has garnered 14.1 Million visits! The description reads:

"Welcome to Chipotle Burrito Builder. Teleport back to the original Chipotle location in 1993, the year the Chipotle burrito was born. Use your skills to build and roll burritos like a true Chipotle crew member.

🌯 ROLL burritos to earn Burrito Bucks + unlock FREE exclusive virtual items

💸 USE Burrito Bucks to purchase extra in-game items

🎒 DELIVER burritos around town in a side quest to unlock a reward"

My Impression The biggest eye opener from investor day was Roblox's marketing executive. She said that every major brand will need a Roblox marketing strategy by 2025. This continues that promise.

Other Roblox News

Fool on Meta vs Roblox

Meta (Facebook) keeps making headlines. The general strokes that we are seeing:

  • Mark Zuckerberg is quote, unquote, "obsessed" about the metaverse
  • Facebook employees are supposedly getting annoyed about the whole thing
  • Meta's metaverse is currently just meh

My Impression There is a lot of spicy drama here that I'm going to glaze over. I think its irrelevant. My belief is that, at best, Facebook could do to Roblox that XBox did to the Play Station - catch up. I don't see Facebook clawing away this early generation from Roblox back to them, nor do I see Facebook converting their audience to their meta.

I think the only way Facebook could convert their current audience is to literally make Facebook a metaverse. One reason I'm against comparing Facebook to Roblox is that Roblox is a gaming platform! They are different things. But they also are not different things. When you look hard at Roblox, you realize Roblox is a giant social media platform. Facebook groups are anologous to Roblox experiences. You can have friends on Roblox. Instead of emojis think digital goods like this hilarious chipotle hat that is impossible to get yet still attained by over 300,000 people!

Rare Chipotle Guac Cup Headphones

Facebook is in catchup mode, hence why they are throwing billions of dollars at their metaverse.

Acquisition of Hamul

bizjournal reported mid-April that startup Hamul was being bought out. Hamul is a video and voice chat app. It enables an overlay you can use in game to see your friends faces, something Roblox discussed in their investor presentation.

Buy Out Speculations

As of early May 2022, there are no reports that Roblox will be bought out. Based on Roblox's investor day, the company looks to be positioning the company for growth.

Is Elon Musk Buying Roblox?

Even though Elon Musk bought Twitter, there are no reports or indications that Elon is looking to buy Roblox and take it private.

Is Meta Buying Roblox?

As of May 2022, there are no reports or indications that Meta, the owner of Facebook, is buying Roblox.

Final Thoughts

The next quarterly presentation is May 10th. Keep an eye on Roblox's key metrics. User hours is a critical metric that must be scrutinized. If user hours don't grow, we may be seeing trouble ahead.

This is an Ongoing Analysis of Roblox Stock

**POSITION UPDATE**

RBLX, Buy

Roblox Corporation
Return: -35.10%

RBLX, Buy

Return: -35.10%


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