Investor Essentials Daily

This gaming company is transforming the way content creators get paid, but it may be too late to jump aboard

Roblox Corporation (RBLX)
June 22, 2021

This company has rocketed since its IPO, given its support by well-regarded investors such as Cathie Wood of Ark Innovation (ARKK) fame.

Despite providing a platform for content creators to profit, it appears the market may already be pricing in too high of a potential.

Also below, the company’s Uniform Accounting Performance and Valuation Tearsheet.

Investor Essentials Daily:
Tuesday Tearsheets
Powered by Valens Research

Looking at traditional media or the modern streaming empires, the amount of money spent on content generation for movies, shows, and written content is massive.

For context, Netflix (NFLX) is planning on spending approximately $17 billion on content generation this year alone.

Additionally, Disney (DIS) is forecasted to spend about $9 billion a year on Disney+ once it fully ramps up. This does not even consider its spending on its other movie and TV franchises.

Yet, for most of these companies’ existence, social media mega giants like Facebook (FB) and Instagram, and service providers like YouTube, have had to pay almost nothing for their content.

This has enabled these players to generate massive profitability levels.

However, it appears that is now changing, as content creators are expecting to get compensated for the content they generate.

One of the companies that is helping these content creators start monetizing their content is Roblox Corporation (RBLX).

The company just recently went public, and came out of the gate hot in the public markets. Overall, the company lets gamers create their own game or content and then profit from it on the Roblox platform.

While this may be a really good start for creators, it may translate into a strong platform for Roblox as well.

With the vast advancements that are rapidly coming to the market, it is important for investors to understand what the market is pricing for the company.

To gain a greater understanding about what the market is pricing in, we can use our Embedded Expectations Framework.

Most investors determine stock valuations using a discounted cash flow (DCF) model, which takes assumptions about the future and produces the “intrinsic value” of the stock.

However, here at Valens we know models with garbage-in assumptions only come out as garbage. Therefore, we’ve turned the DCF model on its head with our Embedded Expectations Framework. Here, we use the current stock price to determine what returns the market expects.

In the chart below, the dark blue bars represent Roblox’s historical corporate performance levels in terms of ROA. The light blue bars are Wall Street analysts’ expectations for the next two years. Finally, the white bars are the market’s expectations for how the company’s ROA will shift in the next five years.

Looking at the Embedded Expectations Chart, it appears investors did not get the memo.

While Roblox had negative ROA in 2020, the market is pricing the company to see ROA rise to 100% levels by 2025.

See for yourself below.

Along with analyzing ROA as a metric, it is also important for investors to understand the growth that is being priced in.

While pricing ROA to reach new peaks, the market is also expecting the company to grow by 50% a year, implying the company will double in size every two years.

Each of these expectations alone are excessive. Together, they are completely unrealistic.

This is why it is important to understand what the market is thinking before making an investment decision. Although the company is allowing content creators to profit, the market is expecting the company to do the impossible.

For Roblox, it might make sense for investors to hold off jumping aboard for the time being.

SUMMARY and Roblox Corporation Tearsheet

As our Uniform Accounting tearsheet for Roblox Corporation (RBLX:USA) highlights, the Uniform P/E trades at -1,471.3x, which is below the global corporate average of 23.7x and its historical P/E of -348.9x.

Low P/Es require low EPS growth to sustain them. That said, in the case of Roblox, the company has recently shown a 1,328% Uniform EPS shrinkage.

Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Roblox’s Wall Street analyst-driven forecast is a 84% and 152% EPS shrinkage in 2021 and 2022, respectively.

Furthermore, the company’s earning power is below the long-run corporate average. However, cash flows and cash on hand are 2x its total obligations—including debt maturities and capex maintenance. Together, this signals a low credit risk.

To conclude, Roblox’s Uniform earnings growth is below its peer averages, and the company is also trading below its average peer valuations.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research