Roblox (RBLX): Key Metrics Weaken Further

Last month, I detailed how the numbers at online entertainment platform Roblox (NYSE:RBLX) were not looking too good. With some pandemic boosted quarters now in the rear-view mirror, growth metrics were starting to really tail off. Recently, the stock has rebounded from new lows with the market settling down a bit, but the company’s May metrics showed continued weakness.

On Wednesday, Roblox reported its May key metrics, seen in this article. As a reminder, the company details the first month of the quarter’s key numbers in its quarterly earnings release. Then we get an update like this for the second month of the quarter with a few weeks left to go in the period. In the graphic below, you can see the first and second key month figures going back to last year’s Q2 period.

I will point out that management noted that the impact of foreign currency fluctuations led to a reduction of around 4% in its May 2022 bookings year over year growth rate. However, the Dollar Currency Index has recently rallied to new highs this month, so this isn’t a headwind that’s gone away since. Some will argue that recent Fed actions will only help the greenback, and the year over year currency comparisons don’t get that much easier for another couple of months.

I’m sure the bulls will point out that without the currency headwind, it would look like the bookings decline improved from April to May. However, we don’t exactly know that’s true, because management didn’t tell us what the currency headwind was in April, so we don’t have truly comparable numbers here. Also, if you look at the year ago reported numbers for bookings, April was a 60% growth midpoint and May was just a 25% boost, so May was facing a much easier number to grow from. In that respect, I’d say that the May 2022 bookings figure was actually a bit worse than it initially appears.

There were two things that really worried me with the monthly numbers. First, the monthly sequential drop of 2.7 million daily active users from April to May was the largest in the past year. Second, the street is currently looking for about a 2.9% decline in Q2 bookings. If you look at the table below, there are a couple of reasons to think that number is going to be very tough to achieve.

If we look at Q1 to Q2 numbers this year, bookings have declined in both months of the current quarter and were much weaker than their Q1 counterparts. Getting Roblox to a minus 2.9% figure for all of Q2 when the first quarter of this year was a minus 3.0% figure seems very tough in that respect. Simple math though tells us that the company needs to have June bookings growth of nearly 10% just to get us to the current street average. That would be a significant improvement over the first two months of Q2, especially given the US dollar strength we’ve seen, so I believe street estimates need to come down.

Given these trends, I also see it difficult at this point for bookings to grow at the 6.6% year over year figure analysts expect for Q3 as well. Remember, last year’s results may have been boosted a bit by the omicron wave of the pandemic. Some of the Q3 comps from a year ago are actually tougher than the Q2 ones. Roblox could be in more trouble than I think if user growth is really starting to fall as seen above.

The other issue I see in the longer term for investors is ongoing dilution. While Roblox has produced hundreds of millions of free cash flow in recent quarters, a lot of that is due to stock-based compensation being added back in the cash flow statement. Had these expenses been paid equally in cash, the free cash flow numbers would not have looked as great. Over the past year, ending in early May, the outstanding share count was up by about 25 million to nearly 542 million and it seems to be growing by about 1% per quarter now. With shares having plunged from their highs, the company may have to redo some of its compensation packages and set lower strike prices for options, which could mean giving out more shares at a similar total compensation level.

Roblox shares traded as low as $20.01 after the latest earnings report was released but have rebounded to nearly $29 at Wednesday’s close. While the average price target of more than $42 seems like great upside for investors, that average was in the high $50s going into earnings and was at nearly $115 last year. With bookings estimates likely to come down a bit in the coming months, I can see the average target dipping into a 3 handle rather soon. I will also point out that the stock could face a significantly technical test soon as shares approach the 50-day moving average (purple line) as seen in the chart below.

In the end, Roblox’s key metrics for May were not very good. As we’ve seen in recent months, the year over year trends continue to worsen a bit, and the note about currency movements doesn’t exactly make things much better. Given what’s been seen in the first two months of Q2 so far, analyst estimates likely need to come down, and now we have to see if user growth is hitting a wall. With the stock up more than 44% from its after-hours low on earnings day, I think investors should be looking for a pullback in the near term.