Did Investors Overreact to Roblox's News?

Shares of Roblox (RBLX 1.35%) drop after the company reports a decrease in daily active users as well as spending. And La-Z-Boy (LZB -0.12%) wraps up the fiscal year with a strong report but shares fall nearly 10%. In this episode of MarketFoolery, Motley Fool analyst Maria Gallagher looks at those stories and discusses eBay (EBAY 1.32%) selling its division in South Korea for $3.6 billion.

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This video was recorded on June 16, 2021.

Chris Hill: It's Wednesday, June 16, welcome to MarketFoolery. I'm Chris Hill. With me today, from the financial capital of the United States of America, it's Maria Gallagher. Good to see you.

Maria Gallagher: Nice to see you, too.

Hill: We've got home furnishings, we've got another sale at eBay, but we're going to start today with Roblox. Its shares are down eight after the company reported a drop in daily active users and a drop in spending. Although I will point out, the daily active users in the month of May on Roblox were 1% lower than April so yes, technically, that is a drop. Year-over-year, the numbers look good, there's some growth there, but I guess my first question is: Do you think this is an overreaction, or is the valuation of Roblox such that any dip in traffic is going to ding them like this?

Gallagher: I think both are true, so you have a lot of very high expectations for Roblox. I think that it's not surprising to me and it's not something that Roblox has shied away from. They have talked about consistently as the world reopens, as people get back and more and more to being physically near each other, we're expecting to go down a little bit. We want that to happen because we want people to be able to see each other again. But we think for the long term, this is something that people will continue to use. What's interesting is, like you said, their daily active users were down about 1%, but that hours engaged was actually up about 1%. The people who are using the platform are still using it and they're really dedicated to using it and spending more and more time on the platform.

Something else that I find really fascinating about Roblox is you have the people who use the metaverse, and then you have these new and interesting revenue streams that come from partnerships with record labels and brands. Zara Larsson, who is a Swedish singer, is hosting a launch party on Roblox. There's going to be a dance party. It's for her new album. It's going to take place in and around her Swedish lake house. It has games, challenges, and exclusive merchandise that people can buy with Roblox. So I think that that's an interesting thing. I'm excited to see how that goes over. I know there was a Lil Nas X concert that was hosted on Roblox that had over 33 million views. What we're seeing is you have the traditional ways that users have been monetized, and then this growth in this new and interesting way for users to be monetized in interactions with their favorite artists and partnerships with those record labels and even brands like Disney and things like that, which I think is pretty fascinating.

Hill: It never even occurred to me that Roblox would be hosting that type of event. Assuming they continue to do that, and by the way, why wouldn't they? How much of a growing threat does Roblox become to platforms that we traditionally think of as hosting those types of events? I'm thinking of a pretty wide range of platforms, everything from Facebook Live to Twitter Spaces more recently, or even just in the same way that iHeartMedia has hosted live concerts across radio stations and their online platforms as well.

Gallagher: Yeah. I think it's going to be really interesting to see in that it's so much more interactive than those traditional platforms, and people can feel much more like they're interacting with their friends and they can be in groups with their friends and interact with them because they know each other's avatars, as well as interacting with new people and getting more exclusive offerings. So I do think that that's really interesting. You have seen in their past quarter, there was a growth in users over 13, and I think that this is another way that they are trying to get more people onto the platform because a lot of their growth is going to come from expanding how many users are interested in the platform and getting out of that core demographic, which had been previously that 9- to 13-year-old demographic. I think this is another push to say, OK, well, if you like Lil Nas X or if you like Zara Larsson, come to this platform. Then if you are there, and you are like oh, this is actually more fun than I realized. I think it's an interesting way to attract new users and continue to monetize those existing users. So I think that's pretty exciting when I think about Roblox.

Hill: Last thing and then we'll move on. How expensive is this stock right now? Obviously, it's about 8% cheaper than it was yesterday. But is this one of those things where if you're looking at Roblox and thinking about the potential, not just for gaming, but also for the type of live events that we've been talking about, this is now a stock on your watch list. Is it really expensive still, or is it getting to the point where as long as your timeline is far enough in the future, now is a good time to buy?

Gallagher: It's definitely still quite expensive. I think it's trading at 42 times last 12 month's revenue and about 20 times next 12-month revenue. You're expecting a lot of growth, you have to see what those bookings look like. I think understanding how they can monetize users in a more effective manner, as well as how they can grow that platform because about 75% of children in the U.S. between the ages of 9 and 13 are already on the platform. You need to see that user growth outside of that core demographic and internationally to see them continue to grow those users in the way that I think is important for them to earn that valuation. I do think there are still some asterisks when you think about the company and how it's valued, so it is definitely still richly valued. But I think it's really interesting and I'm excited personally to see where it's going to go moving forward.

Hill: eBay is reportedly selling its South Korean unit for $3.5 billion, and yet shares of eBay are flat today. Is that because this is not finalized or because someone out there thinks they should be getting more for this? Because last time I checked, $3.5 billion appears to be roughly double the amount of cash that eBay already has on hand?

Gallagher: Yeah. I'm going to give credit where credit is due. I talked a little bit to [Motley Fool Canada analyst] Jim Gillies before I came on today about eBay. He knows a lot about the company, and so what he explained to me too is that this is something that eBay has been doing recently. StubHub was rolled out in February of 2020. There is talk for a deal for their classifieds group that should be done in the next couple of months as well, and then we have this deal happening as well. So I think this is something that people are not surprised that eBay is doing. It had Elliott Management coming in 2019, which is an activist shareholder group, and they're making some of those changes. You see them hiving off those noncore businesses. So I think that that's not a big shock, but I do think that this is interesting: that eBay in Korea is the third-largest e-commerce firm with a market share of about 13%. South Korea is actually the world's fourth-largest e-commerce market at all, with about 36% of the retail market is e-commerce, which I think is pretty fascinating. It seems like a good deal.

It seems like a good choice from eBay as they're continuing to focus on that core business and see what they can do. Because I would also like to say, I didn't realize quite how big that core business of eBay still is. They had gross merchandise volume of $27.5 billion last quarter, their annual active buyers are 187 million, which if we're comparing it to Etsy, there are only 82 million active buyers at Etsy. The annual active sellers at eBay are about 20 million compared to about 4 million on Etsy, which is, in my mind when you think about a marketplace, I go to Etsy so much quicker than I go to eBay. But I think that that's not how most people would react, and I think that the numbers speak for themselves. During quarter 1, the gross merchandise volume for trading cards on eBay was over $1 billion alone, just for trading cards. So they still have this massive core business, and so focusing on that, I think, is going to be pretty interesting for them moving forward. I think that in conclusion, maybe people aren't super surprised because this has now been the path eBay has chosen to take recently.

Hill: eBay is a fascinating company to me in the sense that I think for years now, it just hasn't gotten the respect it deserves. Maybe that's not an issue for the people who work there or for the people who are running it. Over the last five years, the S&P 500 has doubled. Shares of eBay have nearly tripled over the past five years. I'm glad you mentioned when you started your answer. Thank you for reminding everyone that eBay sold StubHub, a platform for tickets to live events. They basically sold it at the absolute perfect time. They sold right before the pandemic hit to Viagogo for about $4 billion. I think that was an all-cash deal. Yeah. I don't know. It's one of those things where people dismiss it, they think of it as just like, "It's this legacy. It's from the dot-com days of the late '90s, like Yahoo! or AOL," or that sort of thing. The difference being that, this is a stand-alone company that is rewarding shareholders, unlike Yahoo! and AOL.

Gallagher: Yeah. Also I would like to say that they have such a growing market in terms of, so I talked about trading cards, but also with sneakers, which was pretty interesting to me. Their sneakers valued above $100 grew triple-digits, and last quarter their luxury watches are growing pretty fast. I also learned in 2014, Superman comic books sold for, I want you to guess, how much do you think a comic book on eBay sold? I'm saying it, it was obviously a lot of money, but I want you to guess how much it was sold for.

Hill: I'm assuming this was the very first Superman comic book, that's my assumption, $3 million.

Gallagher: Close, $3.2 million.

Hill: Where do you think [Motley Fool analyst] Ron Gross keeps it?

Gallagher: I also thought, I was like, "Did someone get this for Ron as a gift?" They also, in 2012, they auctioned off a lunch with Warren Buffett and that sold for charity, and that was sold for $3.5 million.

Hill: Well, and I think the obvious conclusion to draw there, is like, look, Warren Buffett's great. Lunches, what is that? That maxes out at two hours? Whereas you buy the Superman comic, that's forever.

Gallagher: That's forever, and you tell everyone you've ever met. You can show it to them. I guess you could show them a picture of you out having lunch with Warren Buffett, but I don't know that it has the same pizazz.

Hill: Exactly. Fourth quarter results for La-Z-Boy were solidly better than Wall Street was expecting, profits higher, revenue higher. Shares are down almost 10%. I don't understand this. I look at this and I think, yeah, if you just look at the headline of their fourth quarter results, it tracks with everything we've seen recently from businesses like RH Holdings, anything tied to home improvement or home furnishing. Why is this stock getting punished?

Gallagher: Yeah. I think sometimes the sentiment too is the world's opening up again. People are going to spend less time at home. They're going to start spending money on things that they haven't spent money on the past year. People have spent so much money in the past year on home furnishings. But like you said, their quarter 4 results were great. Their sales were up 41%, which beat estimates by about 4%. Their same source sales for the La-Z-Boy furniture gallery is more than double. They were up 114%. Joybird, which is a brand that they own, which I had never heard of, but looked up a little bit. Those sales more than doubled up 144% to about $37 million. So a small part of their overall sales, but still quite interesting. Then for the full-year, their sales were up about 2% to $1.7 billion, which is so much higher than I thought La-Z-Boy sales would have been if you asked me what their sales were. The one thing is that they are anticipating their increase in manufacturing capacity, but they're expecting a lot of headwinds consistently within their supply chain. So raw material price increases are going to be pretty bad for them. They said that they're going to offset that by price increases for their products, but they do warn that they have more demand than they have supply, which isn't something that I would prefer that than the other way around, but you will see that supply chain headwind, which I think you've also seen with a lot of people who have ordered furniture in the past six months, there have been consistently long waiting list. So with low switching costs, I think maybe that's also on people's minds of: "Well, maybe I won't get at La-Z-Boy. Maybe I'll go somewhere else where I can work with a supply chain in a more satisfactory way toward the customers."

Hill: For people of a certain age like myself, La-Z-Boy brings to mind one piece of furniture and one only, and that is the recliner. If you were a kid in the '70s, either you had one in your house or you knew someone who, and it was the greatest thing in the world in terms of furniture. The idea that you could sit in a chair, reach down, pull a lever, and then the feet would go up and you could recline in it. You go to the website for La-Z-Boy, and it's almost unrecognizable for people like me. The fact that they have all these different brands, all these different types of furniture. I'm wondering if you think there is enough brand equity in the name that they just keep it going. Because I don't know, it just seems like they're doing a lot more than the name La-Z-Boy would suggest.

Gallagher: Yeah. I don't think that that's a name that engenders the idea of like, "I'm going to spend a lot," in the way if I talk about West Elm, I know that West Elm is high quality and I'm going to pay a higher price for it. Now that you say that, I remember La-Z-Boys with the recliner because I'm pretty sure my grandpa had one. But when I think of La-Z-Boy, I think the sectionals of those really big sofas that people really like lean into. But I don't know that they have the brand name associated with someone saying: "I need a sofa. Let me make sure I check out La-Z-Boy." Especially with so many online options, I think more people are probably going to a Wayfair or West Elm or one of those other more well-known brands. But their sales were still very impressive. Maybe more people are thinking of La-Z-Boy than I give credit for.

Hill: I guess I'm surprised that, not that it's still around, but that it's still around as a public company, and the market cap is about $1.8 billion. Considering their international footprint, I don't know, it almost makes me wonder if at some point in the next five years someone acquires them because they can take the best parts of this business, put it into a larger distribution channel, and make it work more profitably.

Gallagher: Yeah. That could be interesting, and they do have a brand name. They do clearly have some brand loyalty. So that could be an interesting addition to maybe a larger furniture brand. I'm trying to get that customer base.

Hill: Maria Gallagher, always great talking to you. Thanks for being here.

Gallagher: Thanks so much for having me.

Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.