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Why Roblox Stock Popped Wednesday

By Rich Smith – Nov 24, 2021 at 5:05PM

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Roblox's free cash flow is a better reason to buy the stock than to sell it.

What happened

Online gaming stock Roblox (RBLX 4.95%) bounced back from a two-day sell-off on Wednesday, closing the day up 8.2% -- not quite enough to erase the losses earlier in the week, but at least lessening the pain somewhat.

There wasn't any particular reason for today's bounce in stock price. Then again, there wasn't any particular reason for the sell-offs on Monday or Tuesday, either.

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Image source: Getty Images.

So what

Oh, sure, some analysts will tell you that growth stocks sold off this week because investors got spooked over the risk of rising interest rates in the U.S. Since Friday's close, the yield on U.S. 10-year Treasury notes has risen about 9 basis points.

That doesn't sound like much in absolute terms, but it's about a 6% increase in the attractiveness of investing in bonds as opposed to stocks, and as a general rule, the more attractive debt investments become, the less attractive unprofitable growth stocks become.

Now what

But here's the thing: While Roblox is undeniably a growth stock -- its sales quintupled over the last three years -- it's not just any old one. While you can criticize the stock's valuation and its lack of profits according to generally accepted accounting principles, Roblox is actually a pretty significant cash generator, boasting more than $615 million in positive free cash flow generated over the past 12 months.

Don't get me wrong: At a valuation of 117 times free cash flow, Roblox stock is plenty expensive. I'd be hard pressed to describe the shares as a bargain at today's prices. But it's not the kind of stock that has nothing but revenue growth to support it. Roblox is actually a very profitable business from a cash profits standpoint.

Arguably, this fact should help to support the stock's valuation going forward and protect Roblox from falling too steeply in the midst of broad growth stock sell-offs such as we saw earlier this week.

Rich Smith owns shares of Roblox Corporation. The Motley Fool owns shares of and recommends Roblox Corporation. The Motley Fool has a disclosure policy.

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