One should buy stocks that trade at a modest PE ratio and have a robust growth profile. These are stocks that are undervalued in the marketplace.
During the lockdown, people forgot about this disciple. Instead, they bought anything and everything that was growing. Value was not a factor. It was the potential for growth and disruption that seduced investors. Now they are paying the price.
Roblox Corporation develops and operates an online entertainment platform. The company offers Roblox Studio, a free toolset that allows developers and creators to build, publish, and use 3D experiences and other content, and Roblox Client. This application enables users to explore 3D digital world. They also offer Roblox Education for learning experiences and Roblox Cloud, which provides services and infrastructure that power the human co-experience platform. The company services customer around the world, and it is relatively young. It was formed in 2004.
There was a time when RBLX was growing nicely, rewarding investors for their patients as the company grew to its potential. But growth has turned to anti-growth, and the stock is suffering.
The exhibit above shows the company revenue peaked in 2018 and has headed downhill. This would not be so bad if the company were about to maintain profitability, but that is not the case. Profits have fallen off the cliff.
Looking at the chart above, we cannot find anything to get excited about. The stock has struggled since the company went public in early 2021. The price finally gave up the ghost and started to fall relentlessly in late 2021, reflecting the company’s prior financial performance.
Sadly, the company cannot stop shrinking, much less growing. That being the case, we cannot imagine a scenario where the stock can trade higher in the intermediate future. That being the case, we think investors should consider selling a call spread on the name. With RBLX trading at $40.58. consider the following structure.
In this trade, the investors will collect $200 upfront from initiating the transaction, which they can keep if the share price trades below $40.00 at expiration. Since there is $5 between the strikes, the most one can lose is $300. This loss will occur if the share price trades above $45.00 at expiration. The breakeven level is $42.00, $1.42 (3.5%) above the current price. Since this level is out-of-the-money, the probability of profit is about 61%, assuming a random walk. If the trade works, the investors will make 67% (200/300) on their capital, put at risk for 42 days. With the company losing money and the trend in the share price going from upper left to lower right, we think the probability of profit is higher than that.
