Thinking of Selling RBLX After Today's Rally? Consider This First.

One of today's standouts was Roblox, a data processing services company whose shares are up 4.5%, outperforming the Nasdaq by 4.0%. At $42.1, the stock is not far from its average analyst target price of $42.79.

The average analyst rating for the stock is hold. RBLX may have outstripped the S&P 500 index by 4.0% today, but it has lagged behind the index by -1538.0% over the last year, returning 77.5%.

Roblox Corporation develops and operates an online entertainment platform. The companyis in the technology sector, which groups together a wide range of industries including consumer electronics, software, computer hardware, scientific instruments and IT services. Legendary investor Warren Buffet once stated that he would never invest in technology companies. Apple is now one of his largest holdings.

The risks inherent to the technology sector are clear, but investors simply cannot ignore the potential for strong returns. Even with the lessons learnt in the 2000 tech bubble, the market continues to highly value the promise of technological innovation and the ability for these companies to build and occupy new markets.

Roblox does not publish either its forward or trailing P/E ratios because their values are negative — meaning that each share of stock represents a net earnings loss. But we can calculate these P/E ratios anyways using the stocks forward and trailing (EPS) values of $-1.65 and $-1.72. We can see that RBLX has a forward P/E ratio of -25.5 and a trailing P/E ratio of -24.5. The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 27.16 as of first quarter of 2023. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).

Roblox's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations.

We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a -0.97 Price to Earnings Growth (PEG) ratio. In RBLX's case, the elevated P/E ratio is justified by future earnings growth estimates -- assuming those estimates turn out to be close to reality.

To better understand the strength of Roblox's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:

Date Reported Total Revenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2022-12-31 2,225,052 2,601,178 -41.52 -60.93
2021-12-31 1,919,181 1,917,409 -25.8 10.45
2020-12-31 923,885 950,124 -28.81 -91.56
2019-12-31 508,393 462,452 -15.04 n/a
  • Average operating margins: -27.8 %
  • Average operating margins growth rate: -28.9 %
  • Coefficient of variability (lower numbers indicate less volatility): 39.2 %

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Roblox's last four annual reports, we are able to obtain the following rundown of its free cash flow:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cashflow ($ k) YoY Growth (%)
2022-12-31 369,296 -427,663 -58,367 -110.46
2021-12-31 659,109 -101,129 557,980 35.69
2020-12-31 524,340 -113,120 411,220 2744.63
2019-12-31 99,185 -84,729 14,456 n/a
  • Average free cash flow: $231.32 Million
  • Average free cash flow growth rate: -18.3 %
  • Coefficient of variability (the lower the better): 129.7 %

If it weren't negative, the free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for RBLX, a long term trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the first quarter of 2023, the average P/B ratio for technology companies is 6.23. In contrast, the average P/B ratio of the S&P 500 is 2.95. Roblox's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 103.69, so it's likely that equity investors are over-valuing the company's assets.

As of first quarter of 2023, Roblox is likely overvalued because it has a negative P/E ratio, an elevated P/B ratio, and generally positive cash flows that are on a downwards course. The stock has poor growth indicators because of its consistently negative margins with a negative growth trend, and a negative PEG ratio. We hope this analysis will inspire you to do your own research into RBLX's fundamental values -- especially their trends over time.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.