On Tuesday evening, Roblox (RBLX) released the firm's second quarter financial results. The way I see it, Roblox is probably having trouble executing at a level that the firm was not ready to be at. The firm fell short of expectations across several key metrics.
The problem might possibly be that the stock had, during the pandemic, gotten ahead of where it should have been, and is probably now overvalued for where it is in its development. Expectations, on top of that, may have been pushed out too far. Let's explore.
For the three month period ended June 30th, Roblox posted GAAP EPS of a loss of $0.30 on revenue of $591.2M. Bookings, which includes sales recognized during the period as well as deferred revenue, came to $639.9M. This is where it gets messy. The EPS print fell a nickel, short of expectations and represented net income/loss of $-176.44M, down from $-140.134M for the year ago comp.
Revenue increased 30% and managed a very slight beat, but bookings decreased by 3.8% and fell just short of what Wall Street was looking for. It gets dicier. Net cash provided by operating activities dropped from $191.251M in Q2 2021 to $26.497M for the reporting period. Free cash flow declined from $68.016M a year ago to $-57.315M. You read that right. Negative free cash flow.
Rounding out the guts of this report, average daily active users (DAUs) were up 21% to 52.2M. Consensus was for close to 54M. Hours engaged were up 16% to 11.3B, and average bookings per DAU was $12.25, which was down 21% y/y.
July
The firm does mention, in the press release, that July, though not part of the reporting period, has gotten the third quarter off to a better start. For the month of July, revenue was up 27% year over year, bookings were up between 8% to 10% y/y, DAUs were up 26%, hours engaged was up 25%, but, and this is kind of a big but... average bookings per DAU was down 12% to 14%. This was the only look at the current quarter that I found. The firm is holding their conference call this morning. Something may come out there.
Balance Sheet
As of June 30th, Roblox had a net cash position of $3.075B on the books and current assets of $3.726B. Current liabilities come to $2.264B, leaving the firm with a current ratio of 1.65, which is quite comforting. Roblox may be losing money, but the firm can pay their bills and meet their obligations.
Total assets add up to $4.919B including $186.8M in "goodwill" and other intangibles, which is hardly abusive. Total liabilities less equity comes to $4.368B including $988.3M in long-term debt. Given that the firm could pay off all of its long-term debt-load threefold out of its pocket, I would have a hard time finding fault with this balance sheet. Roblox gets an A+ here.
Wall Street
I have only found one sell-side analyst who reacted at all to this report. Brian Nowak of Morgan Stanley, who is rated at four stars by TipRanks, maintained his "equal weight" rating, while increasing his target price for RBLX from $25 to $32. (RBLX was trading with a $43 handle this morning). Nowak did make note of declining margins and the fact that the runway to profitability for this name has apparently gotten longer.
My Thoughts
Well, you're not buying the name for a share of the profits. Hard to use buying growth as a reason to buy RBLX. Year over year revenue growth the past six quarters is now +140%, +127%, +102%, +83%, +39% and +30% in that order. There's no dividend, so there is no rush to hold equity.
9.4% of the entire float is held in short positions. That's probably high enough to prevent considering a short position myself, but not high enough to provoke thoughts of taking on a long position. This is a long-term story, strictly. That's if you believe that management can turn this ship around.
My thinking is that an investor would have to see something positive technically and then get paid to take on discounted equity risk with a future expiration date.
Readers will see that coming into these earnings, RBLX had been building a cup pattern. This morning's selloff that should test the 21 day EMA could build a handle, which is often a positive. Readers will also note the unfilled gap created this past February (outlined in purple).
In order to fill this gap, the stock needs to see $67. That level would also complete a 38.2% retracement of the entire November 2021 through May 2022 selloff. That's a long way off, but there is a technical story to cling to.
Back to our cup that might add an imaginary handle. This would create a $50 pivot. Much more attainable. Get a breakout off of a $450 pivot and $60 is not stupid. Kapeesh?
An Investor Could... (in minimal lots)
- Sell (write) one October RBLX $35 put for about $2.25, or...
- Sell (write) one October RBLX $40 put for roughly $4.00.
Note: This all depends on one's appetite and tolerance for risk.
Best Case: Trader pockets either $225 or $400.
Worst Case: Trader is long 100 shares of RBLX in October either at a net basis of $36.00 with the shares trading below $40 or at a net basis of $32.75 with the shares trading below $35.
