Roblox Corporation (RBLX) in San Mateo, Calif., is one of the leading online entertainment platforms for consumers aged under 18. The company made its stock market debut via a direct listing on March 10, 2021, and its shares have gained 47.3% since.

However, the stock has declined 17.9% in price over the past month to close its last trading session at $102.40.

The stock slipped 9% last week after the company reported a decline in its daily active users in October after a massive outage on Halloween weekend. Furthermore, RBLX’s near-term prospects look bleak because schools have reopened, and children are spending less time at home.

Click here to check out our Video Game Industry Report 

Here is what could influence RBLX’s performance in the coming months:

Industry Headwinds

Following its crackdown on the IT and education sectors, China announced in August that children and teenagers would be allowed to play online video games for no more than three hours per week. Because RBLX has significant operations in China and its services are primarily focused on minors under the age of 18, this move is anticipated to affect the company’s revenue.

Debt Refinancing

In October, RBLX announced its plan to offer $1 billion of senior unsecured notes through an offering to qualified institutional buyers under Rule 144A of the Securities Act of 1933 and non-U.S. persons outside the United States under Regulation S of the Securities Act. The company intends to use the offering’s net proceeds for general company objectives, such as production and development, capital expenditures, investments, working capital, and future acquisitions and strategic transactions.

Top Line Growth Does Not Translate into Bottom Line Improvement

RBLX’s revenue surged 102.2% year-over-year to $509.34 million for the third quarter, ended September 30, 2021. The company’s average daily active users (DAUs) increased 31% year-over-year to 47.3 million. However, its loss from operations grew 50.3% from its year-ago value of $77.45 million. And its net loss surged 52.2% from the prior-year quarter to $74 million, while its loss per share came in at $0.13 versus $0.26 in the year-ago period.

Weak Profitability

RBLX’s 20.8% trailing-12-months gross profit margin is 59.7% lower than the 51.7% industry average. Also, its ROC, net income margin, and ROA are negative 49.1%, 24.5%, and 12.5%, respectively. Furthermore, its trailing-12-months EBITDA margin stood at a negative 17.6% compared to the 21.9% industry average.

Premium Valuations

In terms of forward Price/Book, the stock is currently trading at 105.57x, which is 3872.2% higher than the 266x industry average. Also, its 21.04x forward EV/Sales multiple is 740.9% higher than the 2.50x industry average. Furthermore, RBLX’s 21.65x forward Price/Sales is 1149.8% higher than the 1.73x industry average.

POWR Ratings Reflect Uncertainty

RBLX has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. RBLX has a D grade for Value. The company’s higher-than-industry valuations are consistent with the Value grade.

The stock also has a C for Growth and Quality. RBLX’s poor financials and weak profitability are in sync with these grades.

Of the 24 stocks in the C-rated Entertainment – Toys & Video Games industry, RBLX is ranked #20.

Beyond what I have stated above, one can view RBLX ratings for Stability, Momentum, and Sentiment here.

Bottom Line

RBLX’s shares have declined considerably in price, with a declining user base over the past month. Moreover, analysts expect its EPS to decline 27.3% for the quarter ending December 31, 2021, and 81.3% this year. So, given the company’s negative profitability and lofty valuation, we think the stock is best avoided now.

How Does Roblox Corporation (RBLX) Stack Up Against its Peers?

While RBLX has an overall D rating, one might want to consider its industry peers, DoubleDown Interactive Co. Ltd. (DDI), Spin Master Corp. (SNMSF), and SEGA SAMMY Holdings Inc. (SGAMY), having an overall B (Buy) rating.

Click here to check out our Video Game Industry Report 

RBLX shares were trading at $97.40 per share on Monday afternoon, down $5.00 (-4.88%). Year-to-date, RBLX has gained 40.14%, versus a 22.25% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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