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Have $5,000? This Sell-Off Stock Is on Sale

By Rich Smith - May 26, 2021 at 6:30AM

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Roblox stock popped after earnings -- then crashed. Could this be a buying opportunity?

$1,200 per adult (plus $500 per child).

$600 per adult (plus $600 per child).

$1,400 per adult (plus $1,400 per child!).

Three rounds of stimulus checks delivered a big cash-influx to American bank accounts over the past year. Some of us invested that money right away, and reaped the rewards as the tech industry took off like a rocketship in 2020. Others may have been more hesitant, and missed out on the rally as a result.

But here's the good news: Markets go up, but they also sometimes go down -- giving investors a second bite at the apple. As it turns out, the U.S. stock market just suffered a bit of a sell-off in some of the best-performing stocks of 2020 -- tech stocks, and in particular, tech stocks playing to a stay-at-home economy. So if you happen to find yourself today with $5,000 lying around, and wondering if there's a good, beaten-up stock to invest it in ...

Might I suggest you give Roblox Corporation (RBLX 10.33%) a look?

Group of fantastical avatars over company name ROBLOX.

Image source: Roblox.

Two months after the IPO

Two months after it IPO'ed at an opening trade price of $64.25, Roblox stock has notched both highs and lows. Roblox hit its peak just one month ago, closing at $82.05 per share on April 13. As fast-growing tech stocks fell out of favor, however, Roblox stock gave back its gains -- even briefly falling below its IPO price last week, before bouncing back somewhat on a terrific earnings report.

Yet, even so, Roblox shares today are down 13.5% from their April 13 peak, and are up only about 10% over their IPO price.

Here's why I think Roblox stock is on sale.

Superior growth

Roblox grew its revenue 140% in its first quarter as a publicly traded company, hitting $387 million in sales and booking $652 million in "Robux" (virtual currency that Roblox users purchase with cash for use in in-game purchases) sales. Because those Robux can be counted upon to transform into revenue in future quarters, this suggests sales at the gaming platform are still growing. Indeed, with such bookings up 161% year over year -- better than the 140% revenue growth number -- it's likely Roblox sales are still accelerating.

Superior profits

And the bigger Roblox gets, the more profitable it appears to be becoming.

In Q1, Roblox reported that it grew its operating cash flow "nearly 4x over Q1 2020," to $164.5 million. And that was after the company spent $51.9 million on the one-time expenses associated with its IPO. If we back out those costs, operating cash flow would have been $216.4 million and free cash flow (FCF) would have been $194 million.

Stop for a moment and consider those numbers. Compare them to Roblox's revenue. What do you see? For every $1 of revenue that Roblox records, it generates cold, hard cash profits -- free cash flow -- of $0.50.

We call this -- the amount of free cash flow that a company generates from its revenue, divided by the revenue itself, a company's "free cash flow margin," and Roblox's FCF margin is truly a mind-blowing 50%. Compare that to some of the other uber-profitable tech stars that you know; for example, Alphabet's free cash flow margin is only 25%. Apple gets only $0.28 in FCF per $1 of revenue. Even Microsoft -- whose operating system is on almost every computer on Earth -- boasts a FCF margin of just 34%.

Roblox has them all beat.

Caveats and provisos

Admittedly, it wasn't all rainbows and unicorns in Roblox's earnings report. Technically, even as it churned out all this cash, when calculated according to generally accepted accounting principles (GAAP), Roblox was required to report its "net income" as negative in Q1. Technically, despite more than doubling its revenue in the quarter, Roblox appears to have "missed estimates" set for it by Wall Street analysts.

And of course, as the global economy recovers from the pandemic, economies open back up, and students spend less time on their computers doing virtual schooling, they may also spend less time gaming on Roblox -- factors that even Roblox admits could slow its growth in the quarters to come.

Despite these caveats, however, I consider last week's sell-off of Roblox stock a mistake. This stock is on sale, and I'm buying more of it.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Rich Smith owns shares of Roblox Corporation. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Microsoft. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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