Roblox Q4 21 – The hangover

Roblox suffers a big hangover from the COVID party.

• Another Metaverse darling is struggling with slower growth underlining that the Metaverse is many years away making it un-investible for all intents and purposes.
• The latest stumble comes from Roblox which reported weaker than expected results which caused the shares to fall another 13% despite having nearly halved in the last 6 months.
• Roblox reported Q4 21 bookings / EPS of $770m / LOSS$0.25 compared to forecasts of $772m / LOSS$0.12.
• Bookings is the key metric of Roblox as it represents the amount of money converted into its virtual currency Robux during the quarter.
• Under accounting rules, this cannot be counted as revenue until the money is actually spent within its virtual world and until then, it sits as a liability on the balance sheet under deferred revenue.
• Roblox has benefitted greatly from everyone being stuck at home, but lower growth will now have to be endured as life begins to return to normal and kids go back to school and the great outdoors.
• This means that the explosive growth in revenue that it enjoyed in 2020 and 2021, (of which it made great use in the timing of its IPO), will now be much slower going forward.
• The user count was also slightly below expectations coming in at 49.5m (up 33% YoY) compared to the market that was expecting 50.5m which caused further disappointment.
• CEO David Baszucki also stated that investors needed to “take the long view” in an admission that he has nothing up his sleeve to bring growth back to the expectations that the market had set for it.
• This is a classic case of good company bad stock.
• In the race to the Metaverse, Roblox is an early leader with a vibrant ecosystem of users and a robust economy.
• Hence, it is in a good position to be one of the leaders when the technology and market conditions are right for smartphone usage to begin migrating elsewhere.
• However, at around 30x 2022 EV / Sales, the market is demanding that the Metaverse happens now and that Roblox is guaranteed a major role in it.
• Unfortunately, this is at odds with reality where RFM Research has concluded that the Metaverse is years away and that there is no guarantee that Roblox will win simply because it is leading now (see here).
• Hence, in the short and medium-term (which is way beyond the scope of most investors), Roblox remains a video game company and it is on this basis that it should trade for now.
• Microsoft is acquiring Activision for something close to 7x revenues which leads me to think that Roblox has much further to fall before it becomes interesting.
• Roblox timed its IPO perfectly with the peak in its growth, but now it will have to pay the price as the inexorable grip of reality takes hold of its fundamentals and valuation.
• I continue to think that the Metaverse remains pretty much un-investable as a pure-play because it remains so far away.
• This means that positions in the companies that stand to benefit from the potential of the Metaverse need to stand on their pre-Metaverse business cases with the Metaverse as a free option.
• The only one close to that at the moment is Meta where sentiment is dreadful and the business from where the current value is derived, is going through a tough patch.
• If I had to buy any Metaverse stock now, it would be this one but frankly, there is plenty of time to wait for a better entry point both in Meta and I suspect all of the Metaverse players.