Cathie Wood is arguably one of the most celebrated and most polarizing investors of our times. Wood's ARK Invest, an investment management firm that backs disruptive and innovative technologies, is known for taking aggressive bets on companies.
Notably, the firm's flagship fund - ARK Innovation ETF (ARKK) - turned out to be the best-performing ETF in the world in 2020, rising 153.2%. However, the post-pandemic performance has been less impressive. ARKK fell 23% in 2021, and gave up roughly two-thirds of its value in 2022. So, along with innovation, it could be said that volatility is another hallmark feature of Cathie Wood's holdings.
As far as ARK Innovation ETF's performance in 2023 is concerned, the fund has returned to its market-beating ways. The ETF is up 47% since the start of the year, outperforming a 41% gain in the Invesco Nasdaq 100 ETF (QQQ) over the same period.
Most of the top 5 holdings of the ARKK ETF are up this year, although performance varies wildly. While Tesla (TSLA) Roku (ROKU), and Coinbase (COIN) have all more than doubled on a year-to-date basis, Zoom (ZM) lags the market with its advance of less than 5%, and Block (SQ) is barely clinging to positive ground for 2023 after today's negative earnings reaction.
While it's not a top 5 ARKK holding, one longtime favorite stock of Cathie Wood is Roblox (RBLX). Along with Meta (META), this company is one of the ARKK holdings that's making headway in the gaming and metaverse space. Wood has stood strong by her RBLX thesis, adding $19.5 million to her stake as recently as April.
RBLX is down 29% from its 52-week high, set on August 11, 2022. And recently the stock has experienced a rapid 16% drop in from their mid-July peak, should investors buy the dip on this Cathie Wood stock, or brace for more downside?
About Roblox
Roblox is an online video game development platform which allows users to program their own games and play games created by other users. Think of it like YouTube, but for games. Just as a YouTube creator can record and publish videos, Roblox Studio users can build and publish games, which are then playable by other Roblox users.
Founded in 2004 by David Baszucki and Erik Cassel, the California-based company is one of the most popular online gaming platforms in the world. Roblox currently commands a market cap of $22.4 billion, and is up 33.5% YTD.
Improving Financials
Roblox posted mixed results for the first quarter. The company reported revenues of $773.8 million - up 22.6% from the previous year, and above the consensus estimate of $766 million. However, the loss per share of $0.44 was higher than the previous year’s figure of $0.27, and wider than the consensus estimate of $0.40 per share.
Nevertheless, the company posted growth across some key metrics in Q1. Average daily active users rose 22% year-over-year to 66.1 million, while hours engaged on the platform increased 23% to 14.5 billion.
Roblox's cash flow generation capabilities also improved in the first quarter. Net cash from operating activities was $173.8 million in Q1, up 11.1% from the previous year. Long-term debt levels have also remained somewhat stable from $989 million at the beginning of the year, edging up to $989.31 million at the end of the first quarter.
Over the long term, the company's bookings jumped threefold from $249.6 million in Q1 2020 to $773.8 million in Q1 2023. In the same period, daily active users (66.1 million in Q1 2023 vs 23.6 million in Q1 2020) and hours engaged (14,493 hours in Q1 2023 vs 4,875 hours in Q1 2020) have also risen exponentially.
Moreover, net cash from operating activities jumped by almost four times to $173.8 million in Q1 2023 from $43.5 million in Q1 2020.
However, consistently widening losses remain a pain point for the company. Losses expanded substantially from $134.2 million in Q1 2021 to $268.3 million in Q1 2023, roughly doubling in 2 years.
Ahead of Roblox's Q2 results next Wednesday, Aug. 9, it's worth pointing out that the company's losses have come in wider than the consensus estimate on four occasions out of the last five quarters. However, the other key metrics cited above have improved at a faster pace than losses have widened over the years, which could bode well for Roblox.
Richly Valued
Roblox is currently valued at a premium compared to some of its peers. For example, Roblox's price-to-sales ratio is currently at 9.48, higher than both Take-Two Interactive's (TTWO) 4.67 and Electronic Arts (EA) at 4.63.
When it comes to the price-to-book (p/b) ratio, Roblox is also trading considerably higher than its peers. With a ratio of 97.32, Roblox's p/b ratio is again way higher than TTWO's reading of 2.83 and EA's 5.12.
Finally, in terms of the price-to-cash flow ratio, Roblox is trading at 59.43, compared to 11.53 for Take-Two and 23.04 for EA.
Analyst Estimates & Ratings
Analysts are not particularly upbeat about Roblox's prospects for bottom-line improvement in the short term. In the current quarter, the consensus estimate calls for a 53.3% decline in earnings per share, while for FY 23, earnings are expected to drop 17.42% overall.
Meanwhile, analysts remain cautiously optimistic about the Roblox stock, maintaining a consensus “Moderate Buy” rating with a mean target price of $41.81 - which indicates upside potential of about 10% from current levels. Out of 21 analysts covering the stock, 11 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, 4 have a “Hold” rating and 5 have a “Strong Sell” rating.
Final Takeaway
I remain of the opinion that Roblox can be a winner in the long term if it can solve the problem of its widening losses efficiently. The company has been displaying steady growth across many other key metrics over the past few years, with a stable balance sheet in tow.
Though the stock's valuation is rich, RBLX is a quintessential growth stock, so I believe it's justified. Investors are willing to pay a premium for growth stocks, which are typically priced based on their future earnings, rather than their current earnings.
As RBLX enhances the usage of generative AI on its platform, as well as the utilization of its data centers, it should improve engagement among its users, which should boost future earnings.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
