Stocks to buy

Roblox Stock Likely to Double Over the Next 24 Months

Roblox (NASDAQ:RBLX) is among the many stocks that has witnessed a deep correction in the last few months. However, it seems that the correction is overdone. At current levels, RBLX stock looks attractive from a long-term investment perspective.

The unsaid fact about markets is that participants ignore the reg flags in times of euphoria. Stocks continue to trend higher. On the other hand, in bear markets, positives are ignored and concerns remain in the limelight. This factor translates into over-reactions on both sides.

It’s important to mention that the broad equity markets face several macro-economic headwinds. It makes sense to gradually accumulate quality stocks. Once sentiments turn positive, RBLX stock is poised for meaningful upside.

In terms of industry tailwinds, the metaverse market was valued at $38.5 billion in 2021. Between the current year and 2030, the market is expected to grow at a CAGR of 39.4%. With Roblox being among the top metaverse plays, there in ample headroom for growth.

However, the stock has corrected for two major reasons. First and foremost, growth stocks have been punished in the correction in the last few months. Furthermore, Roblox is positioned for relatively lower growth in a post-pandemic era.

Having said that, these factors seem to be discounted in RBLX stock.

Ticker Company Current Price
RBLX Roblox Corporation $26.87

Growth Likely to Remain Robust

Roblox reported revenue growth of 127% on a year-on-year basis for the second quarter of 2021. For the most recent quarter (Q1 2022), the company’s revenue growth declined to 39%. Clearly, there has been a significant deceleration in growth and RBLX stock has adjusted on the downside.

However, Roblox reported top-line growth that’s in sync with the expected growth in metaverse. It would be unrealistic to expect the company delivering more than 100% top-line growth again. Having said that, growth of 30% to 40% through 2030 would still be attractive.

This seems likely considering the following factors.

For Q1 2022, the company reported daily active users of 54.1 million. On a year-on-year basis, DAU increased by 28%. DAU growth for users younger than 13 was 20%. However, DAU growth for users 13 and older was 38%. In the last few quarters, DAU growth for the latter group has been robust. Roblox therefore has a wide addressable market and this will help growth sustain.

Roblox has also been increasing global presence and that’s another reason to be bullish. For Q1 2022, the company reported a 10% de-growth in hours engaged in U.S. and Canada. However, the growth in the number of hours engaged in the Asia-Pacific region was 104%. Over the long term, emerging markets will increasingly contribute to growth and cash flows.

Roblox has also mentioned in their Q1 2022 report that the company is expanding monetization initiatives. This is likely to boost monetization per hour and support top-line growth.

Roblox reported cash and equivalents of $3.1 billion as of Q1 2022. Further, the company is positioned for annualized free cash flow of $400 to $450 million. With robust financial flexibility, there is ample headroom to invest in innovation.

Bottom Line on RBLX Stock

Between Q1 2019 and the most recent quarter, Roblox has reported sustained growth in daily average users. Even on a quarter-on-quarter basis. Of course, growth has decelerated, but the stock has also corrected by 76% in the last six-months.

With a global addressable market and positive tailwinds for metaverse, RBLX stock seems attractive. It’s also important to note that the company is already reported positive free cash flows. Even with relatively muted growth, cash flows will swell in the coming years.

RBLX stock is therefore an attractive buy at current levels. I see the stock doubling in the next 12 tp 24 months.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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