Roblox Corporation (RBLX) registered a 26% surge in its stock price on February 15 after its fourth-quarter earnings release revealed that its loss per share of $0.48 came in lower than the consensus estimate.

RBLX’s bookings, which capture growth by counting virtual currency sales, also beat analysts’ expectations by registering a 17% year-over-year increase, which justifies the optimism.

However, despite the surge in price that accompanied its earnings release, RBLX’s stock has declined 6.6% over the past six months and 28.9% over the past year to close the last trading session at $36.65.

Let's investigate whether RBLX’s fundamentals are strong enough to keep it in the game.

Weak Financials

For the fiscal year 2022, which ended December 31, 2022, although RBLX’s revenue increased 15.9% year-over-year to $2.23 billion, its loss from operations widened 86.6% year-over-year to $923.78 million.

As a result, the company’s adjusted EBITDA during the fiscal decreased by 47.1% year-over-year to $356.46 million, while the net loss attributable to common stockholders worsened by 88% and 59.8% year-over-year to $924.37 million and $1.55 per share, respectively.

Poor Profitability

RBLX’s trailing-12-month gross profit margin of 16.38% is lower than the industry average of 49.63%. Similarly, its trailing-12-month EBITDA and net income margins of negative 35.67% and 41.54% stand out in stark contrast to the respective industry averages of 19.21% and 3.38%.

Moreover, RBLX’s trailing-12-month ROCE, ROTC, and ROTA also fall remarkably short of the industry averages of 3.73%, 3.93%, and 1.77%, respectively.

Discouraging Analyst Estimates

Analysts expect RBLX’s loss per share for the fiscal year 2023 to widen 14.2% year-over-year to $1.77. Losses are expected to mount by a further 2.6% year-over-year during the next fiscal to come in at $1.82 per share.

Moreover, RBLX missed consensus EPS estimates in three of the trailing four quarters.

Stretched Valuation

Despite the price decline, the stock is still trading at a valuation higher than its peers. RBLX’s forward EV/Sales multiple of 6.22 is significantly higher than the industry average of 1.97. Similarly, its forward EV/EBITDA multiple of 58.60 is also higher than the industry average of 8.58.

Moreover, its forward Price/Sales multiple of 6.67 compares unfavorably to the industry average of 1.27.

POWR Ratings Reflect Weakness

RBLX has an overall F rating, which equates to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. RBLX also has an F grade for Stability, as indicated by its 24-month beta of 2.27 and the spread between its 52-week high and 52-week low prices of $53.88 and $21.65, respectively

RBLX has a D grade for Growth and Momentum, in sync with bleak analyst estimates and unfavorable price action. It also has a D grade for Value and Quality, consistent with its stretched valuation and impressive profitability.

Unsurprisingly, it brings up the rear of the list of 21 stocks in the Entertainment - Toys & Video Games industry.

In addition to what has been discussed above, all POWR Ratings for RBLX can be found here.

Bottom Line

While the pandemic proved to be a major windfall for companies such as RBLX, with most of its users interacting virtually through its platform, reversal to pre-pandemic lifestyles has been a major headwind with user engagement losing momentum and metaverse hype fading, at least for the time being.

Moreover, macroeconomic uncertainties related to inflation and the increasing likelihood of an interest-rate-led recession have seen consumer spending on interactive entertainment decline more than publishers anticipated just a few months ago.

In fact, on September 9, 2022, it was reported that RBLX would introduce online advertising to diversify its income stream amid its ongoing battle against a slowdown in revenue growth and its quest for profitability, further dented by its obligation to pay its creators for converting their Robux back to real-world currencies.

Given its weak fundamentals and an increasingly uphill path to profitability, it may be wise to steer clear of this stock until the company proves the sustainability of its business model.

Stocks to Consider Instead of Roblox Corporation (RBLX)

Unfortunately, the odds of Roblox outperforming in the weeks and months ahead are greatly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these 3 A-rated (Strong Buy) or B-rated (Buy) stocks from the Entertainment - Toys & Video Games industry instead:

Playtika Holding Corp. (PLTK)

SciPlay Corporation (SCPL)

DoubleDown Interactive Co., Ltd. (DDI)

 What To Do Next?

Get your hands on this special report:

7 SEVERELY Undervalued Stocks

The best part of the recent bear market is that there are thriving companies trading at tremendous discounts to fair value.

This combination of stellar earnings growth and low price provides a great catalyst for investor success.

And this report focuses on the 7 best of these stocks primed to soar in the weeks ahead. Click below to claim your copy now.

7 SEVERELY Undervalued Stocks

RBLX shares were trading at $36.63 per share on Tuesday afternoon, down $0.02 (-0.05%). Year-to-date, RBLX has gained 28.71%, versus a 4.38% rise in the benchmark S&P 500 index during the same period.

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.

More...