Famous gaming company Roblox Corporation (RBLX) operates an online entertainment platform. The company provides Roblox Studio, a free toolset for developers and creators to build, publish, and operate 3D content; Roblox Client, an application that allows exploring the 3D digital world; Roblox Cloud, which provides cloud-based services and infrastructure; and Roblox Education for learning experiences.

The company serves customers in the United States, the United Kingdom, Canada, Europe, Asia-Pacific, and internationally.

The company reported disappointing second-quarter results and hinted at decelerating growth. Moreover, the significant decline in bookings (an adjusted revenue measure) paints a gloomy picture. Bookings fell 3.8% year-over-year to $639.90 million in the second quarter. For July, the decline in bookings widened, falling between 8% and 10% year-over-year.

Furthermore, last October, RBLX priced the offering of $1 billion aggregate principal amount of its 3.9% senior notes due 2030. The interest on these notes will be payable in cash semi-annually and will mature on May 1, 2030, unless earlier repurchased or redeemed. This note offering is expected to increase the company’s interest burden and reduce its cash balance.

As of June 30, 2022, RBLX’s total liabilities stood at $4.37 billion, compared to $3.97 billion as of December 31, 2021.

Despite deteriorating financials and bleak growth prospects, RBLX has gained 66.3% since June 16. The recent rally across the major market indexes on improved investor sentiment contributed to the surge in its stock price.

However, the stock has plunged 60.2% in price year-to-date to close the last trading session at $41.07. It is currently trading 71% below its 52-week high of $141.60, which it hit on November 22, 2021.

Here is what I think could influence RBLX's performance in the upcoming months:

Top-line Growth Does Not Translate into Bottom-line Improvement

For the fiscal second quarter ended June 30, 2022, RBLX’s revenue grew 30.2% year-over-year to $591.21 million. However, the company's operating costs and expenses increased 27.5% from the year-ago value to $761.47 million. Its loss from operations amounted to $170.27 million, worsening 19.1% year-over-year.

Furthermore, RBLX’s adjusted EBITDA declined 69.7% from the prior-year period to $54.64 million. The company’s net loss and loss per share attributable to common stockholders came in at $176.44 million and $0.30, widening 25.9% and 20% year-over-year, respectively. Its cash outflow for investing activities amounted to $89.98 million, up 287.3% year-over-year.

Weak Growth Prospects

Analysts expect revenues to increase 7% year-over-year to $682.24 million in the fiscal 2022 third quarter (ending September 2022). However, the consensus loss per share estimate for the ongoing quarter is expected to come at $0.32, worsening 149.7% from the same period in 2021.

Furthermore, the company's revenue for the fiscal year 2022 (ending December 2022) is expected to decline marginally year-over-year to $2.71 billion. Also, analysts expect RBLX’s loss per share to worsen by 27.01% for the current year and 16.4% for the following year.

Low Profitability

In terms of trailing-12-month gross profit margin, RBLX’s 23.24% is 54% lower than the 50.52% industry average. And its trailing-12-month EBITDA margin of negative 20.62% is lower than the 19.31% industry average. Likewise, the stock’s trailing-12-month net income margin of negative 25.11% compares with the industry average of 5.66%.

Furthermore, RBLX’s trailing-12-month ROCE, ROTC, and ROTA are negative at 103.18%, 24.15%, and 11.26%, respectively.

Frothy Valuation

In terms of forward EV/Sales, RBLX’s 8.44x is 317.1% higher than the 2.02x industry average. Its 73.26x forward EV/EBITDA is 756.3% higher than the 8.56x industry average. Likewise, the stock’s 9.04x forward Price/Sales is 570.1% higher than the 1.35x industry average.

In addition, RBLX’s 61.16x forward Price/Cash Flow is 592.1% higher than the 8.84x industry average.

POWR Ratings Reflect Bleak Prospects

RBLX's overall F rating translates to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

RBLX has a grade of F for Stability. The stock’s relatively high beta of 2.32 justifies the Stability grade. In addition, it has an F grade for Value, in sync with its higher-than-industry valuation multiples.

RBLX is ranked last out of 22 stocks in the Entertainment - Toys & Video Games industry.

Beyond what I have stated above, we have also given RBLX grades for Sentiment, Growth, Quality, and Momentum. Get all the RBLX ratings here.

Bottom Line

RBLX delivered disappointing fiscal 2022 second-quarter results. And its near-term prospects look uncertain amid declining consumer demand, as indicated by a sharp drop in the company’s bookings. Furthermore, the stock is currently trading below its 200-day moving average of $58.39, indicating a downtrend.

Given its disappointing financials, bleak growth prospects, higher-than-industry valuation, low stability, and low profitability, we think it could be wise to avoid the stock now.

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

RBLX has an overall POWR Rating of F. One could also check out these other stocks within the Entertainment - Toys & Video Games industry with an A (Strong Buy) rating: Spin Master Corp. (SNMSF) and JAKKS Pacific, Inc. (JAKK).

RBLX shares were trading at $41.62 per share on Wednesday morning, up $0.55 (+1.34%). Year-to-date, RBLX has declined -59.65%, versus a -12.64% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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