Roblox Shows Huge, Unusual Call Option Activity - Is RBLX Stock Too Cheap?

Roblox Corp (RBLX) stock is recovering from a trough following weaker financial guidance last quarter. Today, an unusually large volume of call options has been traded in RBLX. This implies some believe RBLX is undervalued, including some Wall Street analysts

RBLX is at $54.34 today, up over 14% today, after Arete Research Services LLP upgraded RBLX to buy from neutral with a price target of $95. That is after the stock hit a recent low of $41.50 on June 10.

According to Yahoo! Finance, the rollout of parental controls for its Roblox games, along with strong free cash flow (FCF), will power the stock higher.

As a result, Barchart reports huge, unusual trading in near-term RBLX call options. That could also be partly why the stock is moving so high today.

The Barchart Unusual Stock Options Activity Report shows that over 72 times the prior number of calls have traded at the $59.00 strike price call options expiring July 17.

This strike price is 8.8% above today's price, so it is “out-of-the-money” (OTM). However, the premium is about $2.16, as investors believe RBLX can rise over $61.16 (i.e., $59.00 +$2.16) by the end of the next 18 days.

Our analysis shows that, based on Roblox's potential free cash flow (FCF) could be worth over 56% more at $84.62 per share. Let's look at why.

Strong Free Cash Flow Prospects

Management guided last quarter that they expect revenue to range between $5.865 billion and $6.135 billion this year. Moreover, they also projected that FCF could range between $1.050 billion and $1.275 billion.

This is very unusual for a company to project its FCF and shows that it has strong confidence in its cash flow and margins.

For example, using the midpoints of these forecasts, management expects its 2026 FCF margin to be 

   $1.1625b / $6.0 b = .19375 = 19.4% FCF margin, with a high of 21.25% (i.e., $1.275b/$6b)

In addition, over the last 12 months, its FCF margin has been 28.78%, according to Stock Analysis. In fact, in Q1, its FCF margin was 41.3%, although this included a one-time sale.

Looking forward, analysts project that sales next year will rise to $8.9 billion, up from $7.48 billion this year. That implies an average of $8.2 billion over the next 12 months (NTM).

Therefore, using an FCF margin estimate of 29%, its FCF could rise to 

  $8.189b revenue x 0.29 = $2.37 billion NTM FCF

That shows that Roblox is on track to over double its FCF in the next year. This could lead to a substantially higher stock market value for Roblox.

RBLX Price Targets

One way to value a company like this is to assume it could potentially pay out 100% of its FCF to shareholders as a dividend. Then we can calculate its dividend yield (i.e., as an FCF yield).

For example, over the trailing 12 months (TTM), its $1.524 billion in TTM FCF, according to Stock Analysis, can be divided by its present market cap, $38.785b according to Yahoo! Finance:

  $1.524b / $38.785b = 0.0392 = 3.9% FCF yield

Therefore, applying this to the NTM FCF forecast (above), shows what Roblox's fair market value (FMV) could be:

  $2.37b / 0.0392 = $60.5 billion FMV

That is 56% higher than today's market cap:

  $60.5b / 38.785b  = 1.56

In other words, the price target for RBLX is 56% higher:

  $54.34 x 1.56 = $84.77 PT

Other analysts also have higher PT forecasts. For example, Yahoo! Finance reports that the average PT for 35 analysts is $64.81. Barchart's mean price survey PT is $65.48. Similarly, AnaChart's survey PT is $96.25.

Summary and Conclusion

The bottom line is that RBLX stock looks deeply undervalued today, based on its strong free cash flow (FCF) forecast.

That could be why there is heavy call option buying today. However, investors should be careful in jumping into this trade, as the expiry period is only 18. 

For example, it may take several more quarters of strong FCF performance for the stock to move significantly higher. The PTs shown above assume a full year of strong FCF growth. It may take a while for these higher FCF projections to come to pass.