Insights

Why Roblox Shares Just Crashed Before Earnings

What happened
After three days of nonstop selling, major market indices made an attempt to turn from red to green on Tuesday, as the S&P 500 gained almost 2% — before turning around, losing it all, and plunging back into losses. As of 12:35 p.m. ET, the S&P is down 0.6%.
Investors, I fear, are losing faith in the rally. With its stock down 8%, video gaming platform Roblox (NYSE: RBLX) investors are particularly pessimistic.
Image source: Roblox.

So what
Can you blame them, though? This morning, just hours before Q1 earnings are due out, two separate analysts announced downbeat expectations for Roblox before the company even got a chance to announce any bad news!
First, Wedbush initiated coverage of Roblox with a neutral (i.e., don’t buy) rating and a $28 price target. Then Truist cut its price target on the stock. The good news is that Truist only cut Roblox to $36 a share, which actually implies a potential 60% upside in the stock. 
Now what
The analysts may be right to be pessimistic. According to consensus estimates, Roblox is going to report about 26.5% sales growth tonight — but no profits at all, only a $0.21 per-share loss. For that matter, Roblox hasn’t ever earned a profit, and analysts who follow the company don’t see Roblox turning profitable for as far out as they’ve bothered to make estimates. (Currently, losses are forecast through at least 2026.)
The good news is that while Roblox may not be profitable from a GAAP perspective, it generates positive free cash flow — $565 million of it last year. The bad news is that free cash flow as a percentage of revenue is down steeply over the past year, falling from 45% in 2020 to 29% last year.
If I were to focus on just one number in Roblox’s report tonight, it would be how much free cash flow Roblox generated in Q1. And then I’d look at what percentage of revenue that free cash flow number represented. If it’s more than 29%, things are looking up for Roblox, but if it’s less than 29%, things are still getting worse, and it may be time to sell.
Rich Smith has positions in Roblox Corporation. The Motley Fool has positions in and recommends Roblox Corporation. The Motley Fool has a disclosure policy. –

What happened

After three days of nonstop selling, major market indices made an attempt to turn from red to green on Tuesday, as the S&P 500 gained almost 2% — before turning around, losing it all, and plunging back into losses. As of 12:35 p.m. ET, the S&P is down 0.6%.

Investors, I fear, are losing faith in the rally. With its stock down 8%, video gaming platform Roblox (NYSE: RBLX) investors are particularly pessimistic.

Image source: Roblox.

So what

Can you blame them, though? This morning, just hours before Q1 earnings are due out, two separate analysts announced downbeat expectations for Roblox before the company even got a chance to announce any bad news!

First, Wedbush initiated coverage of Roblox with a neutral (i.e., don’t buy) rating and a $28 price target. Then Truist cut its price target on the stock. The good news is that Truist only cut Roblox to $36 a share, which actually implies a potential 60% upside in the stock. 

Now what

The analysts may be right to be pessimistic. According to consensus estimates, Roblox is going to report about 26.5% sales growth tonight — but no profits at all, only a $0.21 per-share loss. For that matter, Roblox hasn’t ever earned a profit, and analysts who follow the company don’t see Roblox turning profitable for as far out as they’ve bothered to make estimates. (Currently, losses are forecast through at least 2026.)

The good news is that while Roblox may not be profitable from a GAAP perspective, it generates positive free cash flow — $565 million of it last year. The bad news is that free cash flow as a percentage of revenue is down steeply over the past year, falling from 45% in 2020 to 29% last year.

If I were to focus on just one number in Roblox’s report tonight, it would be how much free cash flow Roblox generated in Q1. And then I’d look at what percentage of revenue that free cash flow number represented. If it’s more than 29%, things are looking up for Roblox, but if it’s less than 29%, things are still getting worse, and it may be time to sell.

Rich Smith has positions in Roblox Corporation. The Motley Fool has positions in and recommends Roblox Corporation. The Motley Fool has a disclosure policy.

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