This Stock Has Significant Upside

Roblox Corporation (NYSE:RBLX) posted stellar earnings on Feb. 15 for its fourth quarter and 2021 at large. As a result, RBLX stock could be worth significantly more than Friday’s numbers based on its powerful free cash flow (FCF).

That is good news for holders of the stock, as it has had a rough time lately. Roblox is down significantly from its peak price of $134.72 on Nov. 19.

As of Friday, March 11, RBLX stock had fallen to $39.24, representing a drop of almost 71% from the peak. Moreover, from the end of last year, the stock is off 62% from $103.16, as of Dec. 31, 2021.

The Roblox stock price correction has gone too far. This is especially the case since the company is profitable. It also produces significant amounts of FCF which is key to its higher valuation.

Where Things Stand With Roblox

Roblox reported that its Q4 revenue rose 83% year-over-year (YoY) to $568.8 million. This reflects a 20% increase in bookings and a 33% rise in average daily active users (DAUs).

But more importantly, Roblox produced $77.3 million in free cash flow for the quarter. Free cash flow represents all the cash the company generates after all expenses, costs, and capital expenditures. It is essentially “free” to allow the company to pay dividends, reduce debt, make acquisitions or just accumulate.

Last quarter the FCF represented 13.6% of its quarterly revenue. That is a decent FCF margin.

In addition, for the full year 2021, Roblox produced $558 million in FCF on revenues of $1.92 billion. That represents an FCF margin of 29% for the full year.

This is a significantly higher FCF margin than what it did during Q4. So, there is probably hope that the ongoing FCF margin would be at least 20% to 25% going forward.

Analysts surveyed by Refinitiv (and reported by Yahoo! Finance) estimate that this year sales will rise 11.3% to $3.1 billion. And by 2023, they are forecast to hit $3.78 billion, or twice the level of 2021.

As a result, expect to see the company’s FCF skyrocket as well. For example, even if the company has just a 20% FCF margin by the end of 2023, its free cash flow could reach $756 million. And if we use a 10% discount rate, the present value works out to 82.64% of that number, or $625 million. We can use that to value RBLX stock going forward.

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What Roblox Stock Is Worth

Part of the reason I am so confident that the company will produce higher FCF is that the total game time that kids playing on Roblox-powered games was up 28% in Q4. And for the year as a whole, it was up 35%. The more time kids are playing these games the more cash flow the company produces.

As a result, we can probably use at least a 2% FCF yield metric to value RBLX stock. That is also the same as multiplying the FCF of $625 million for 2023 adjusted for present value by 50 times. This works out to a market capitalization of $31.25 billion.

That is 35.5% higher than the $23.064 billion market cap for Roblox on Friday, as measured by Yahoo! Finance. This means that RBXL stock is worth $53.17 per share, or 35.5% more than its price of $39.24 on March 11.

That is actually well below the average price of $77.22 of 12 analysts surveyed by Refinitiv (reported by Yahoo! Finance). Their price target represents a potential upside of 97% in RBLX stock from here.

This is also similar to the $78.55 price target taken from the TipRanks survey of 12 analysts. Their average price target is over 100% higher than today’s price.

What to Do With RBLX Stock

We could probably raise our target significantly as well. For example, if we used a 1.5% FCF yield metric (equivalent to 67x FCF), our target price would rise 80.7% to $70.89 per share. But just to be conservative we left the multiple at 50 x FCF (equivalent to a 2% FCF yield).

This shows that Roblox is still quite undervalued, especially given its powerful FCF generation and revenue growth. As a result, investors should expect to see significant upside in RBLX stock, especially now that it is at a trough price.

— Mark R. Hake

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Source: Investor Place

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