Roblox (RBLX 4.18%) reported Q1 earnings last week, and the news was... disappointing. After beating expectations for both sales and earnings, the online gaming platform proceeded to warn that future growth in sales and "bookings" (essentially, sales of Robux virtual currency to users) won't be as fast as many investors hoped.
That's not the kind of news that growth investors like to hear, and Roblox stock sold off hard after earnings -- but not to worry, says Piper Sandler analyst Thomas Champion. Within a year, the analyst expects Roblox stock that fetches barely $31 apiece today to sell for $40 a share.
Is Roblox stock a buy?
Is Champion right about that? And why does he think Roblox stock is a buy, when everyone else is selling Roblox stock?
Champion himself admits that Roblox's news was not good -- which is why he cut his price target from $56 previously to $40 today. While Q1 results were "fine," says the analyst, user engagement appears to be weakening. Furthermore, guiding to 15% bookings growth this year after recently predicting growth would be closer to 20% may create "credibility issues" for management.
I actually don't think that's an issue. If gamers aren't spending as much time on Roblox as management thought they might, then getting ahead of the bad news by lowering guidance ahead of time is actually the right move to maintain credibility with investors. What worries me more is that at a market capitalization of $20.1 billion, but with only $247 million in trailing free cash flow, Roblox stock simply costs too much -- about 81x FCF -- to justify, whether it's growing at 15% or 20%. In fact, ideally, a growth investor would want to see Roblox grow at closer to 80% annually to justify its current share price.
No one anticipates Roblox doing this, which means the stock is no buy at today's share price of $30 and change. It also means Roblox stock isn't worth the $40 a share that Champion predicts for it.
