When Roblox (RBLX 3.33%) went public in March of last year, I was excited about it -- but I'm not excited anymore.
Prior to its IPO, the company's S-1 prospectus highlighted the powerful economics of operating a videogame platform on which a company's users were often also its game designers. Simply put, for every $1 in revenue Roblox was taking in, the company was able to produce $0.50 in real cash profit -- free cash flow. Those were incredible numbers. Microsoft doesn't even have a free cash flow margin that high -- nor, for that matter, does Apple.
Roblox maintained this impressive rate of cash production through at least its first quarter as a publicly traded company -- but then things began going downhill. In Q2 2021, only 37% of Roblox's revenues were converted into free cash flow. (Still great, but less so.) In Q3, the percentage dropped to 35%. And in Q4 -- disaster! -- it free cash margin fell toward 16%.
And I regret to inform you that the news from Roblox's Q1 2022 earnings report, which came out Tuesday evening, wasn't much better.
The most important number for Roblox
In Q1, Roblox grew its revenues 39% year over year to $537 million, a result that fell far short of Wall Street's expected $638.5 million. It also reported a $0.27 per share net loss -- worse than the $0.21 per share loss forecast by analysts.
Wall Street was quick to punish the stock for those misses. After Roblox shares slid 5.8% on Tuesday prior to the report, they fell a further 4% in after-hours trading.
As if the sales and earnings misses weren't bad enough, Roblox also reported that it generated only $104.6 million in free cash flow for the quarter. That worked out to a 19.5% free cash flow margin for the company. On the one hand, that was a sequential improvement from Q4. (In an article published before the report dropped, I advised investors to keep an eye out for evidence that free cash flow margins might begin improving.) On the other hand, 19.5% is still far worse than the 50% margin that originally attracted me to Roblox.
If there's any good news to be had, it's this: Roblox stock was trading in the neighborhood of $24 as of Wednesday's close. That's just over a third of the $69.50 those shares cost on the day of its IPO. With a trailing free cash flow of $528 million and a market capitalization of $14.6 billion, Roblox is valued at less than 28 times free cash flow. With revenue up 39% year over year and the free cash flow yield inching at least temporarily higher, it's possible that the worst of the damage has now been done and the stock price can begin rising again.
But if Roblox can't get back to producing 50% free cash flow margins, I suspect it's going to be a long time before we see it trading at $69.50 a share again.