Roblox Stock Has a Legitimate Shot at Doubling by 2022

Just one month ago I wrote that Roblox (NYSE:RBLX), the gaming “multiverse” company, was worth $109.21 — 45% above the price at the time. As of June 2, RBLX stock was just over $100 and is up close to 30% in the past month. I suspect that the stock is approaching its full value for the time being. However, over the next year it could still move much higher, probably at least 100% higher.

One reason that I say this is because I take careful note of the company’s powerful free cash flow (FCF) generation. Even though total game time usage (mostly by children) was down in the recent Q1 period, revenue and FCF were higher.

Powerful Free Cash Flow Machine

For example, sales were up 140% to $387 million, and 15.4% higher than the prior quarter’s $335.2 million. But more importantly, Roblox produced $142.1 million in FCF during Q1. That represents 36.7% of its total revenue.

This is a very high margin and many companies, including typically profitable software companies, would love to have this high a FCF margin. It essentially means that the gaming company is extremely profitable and is a cash cow.

In fact, last quarter its FCF was just $127.4 million, so the FCF grew by 11.5% quarter over quarter. This represents a FCF margin of 38%. However, even though Roblox’s FCF margin fell from 38% in Q4 to 36.7% in Q1, the fact is these are very high levels. Moreover, it would be normal for the Christmas season to have a higher FCF margin.

But more important than anything, we can now reliably use the $142 million FCF and the 37% average FCF margin to estimate the value of RBLX stock.

What RBLX Stock Is Worth

One way to estimate its value is to use the run rate FCF and divide this by the market cap. That produces the FCF yield number. For example, if Roblox keeps generating $142 million in FCF over the next four quarters, it will have an annual FCF production of $568 million.

Since RBLX stock has a market value of $55.43 billion, this means that it has a FCF yield of 1%. This is seen by dividing $568 million by $55.43 billion. The fact is a 1% FCF yield is a very high metric. That is one reason why I feel that RBLX is probably close to a full valuation.

Using FCF Margin to Value Roblox

However, let’s take another look at its valuation using the FCF margin concept. For example, analysts now estimate that in 2022 sales will rise by 20% from $2.51 billion in 2021 to $3.02 billion. Therefore, using a 37% estimated FCF margin, FCF will reach $1.1174 billion.

This is over twice as high as the $568 million in run-rate FCF production estimate. Therefore the FCF yield is only 2.0% (i.e., $1.117 billion / $55.43 billion).

This implies that over the next year, assuming the stock rises to a 1% yield, Roblox could end up with a $111.74 billion market cap. That represents a potential gain of 101% (i.e., $111.74 billion / $55.43 billion). This also means by next year RBLX stock could be trading at $201 per share.

Where This Leaves RBLX Stock Now

So, even though RBLX stock is probably at full value for right now, if sales and FCF keep at the same pace the stock will likely double over the next year. This is obviously highly dependent on the growth rate in sales.

But kids are still spending a lot of time on the Roblox gaming platform. Moreover, the number of users is still growing. Last quarter it had 42.1 million daily active users (DAUs). This was up 79% year over year and well over the guidance of 39.6 million users.

In addition, there were just 37.125 million DAU’s at the end of Q4. That means that quarter over quarter the number of users grew 13.4%. This is huge. It implies that the annual growth rate in DAUs is still very high at 65.4% on a compounding quarterly basis. That more or less guarantees that the company’s high FCF growth and margins will continue.

This means that, although RBLX stock is probably fully valued right now, investors can likely expect to see the stock rise at least 100% to $201 over the next year.

On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.