Crazy Like A Fox, I Bought Roblox (NYSE:RBLX)

Roblox Developer Conference 2019

Ian Tuttle/Getty Images Entertainment

The Winter Warrior’s Contrarian Mindset

Sometimes it pays off big if when you do the unexpected and go against the prevailing belief system, like buying Roblox (NYSE:RBLX) when everyone else thinks it’s a dud having a high risk of performing badly. In fact, the below graphic is an image of Seeking Alpha’s Quant rating warning I saw when looking at the chart of the stock.

quant warning

Negative Quant Rating Warning (Seeking Alpha)

To some, this would make them stop in their tracks and forget about buying the stock. Yet, it actually made the contrarian in me stand up and take notice. Contrarians tend to venture into dangerous places where other fear to tread. Let me explain.

A 10th Mountain Winter Warrior Lesson Learned

As a Winter Warrior with the famed 10th Mountain division, the lesson learned that sometimes it pays to be “crazy like a fox” was instilled in me when reading about the unit’s famed first mission in World War ll.

The 10th Mountain out of Camp Hale, Colorado was formed specifically as an alpine warfare unit to take Mount Belvedere in the Northern Apennines mountains of Italy held by the Germans during World War ll. This was a very important strategic piece of alpine terrain. The mountain peak needed to be taken in order to win the whole of Italy. The Americans had tried and failed to take it several times before the Winter Warriors of the 10th Mountain arrived.

To take the ridge, the 10th Mountain would need to scale steep cliffs. The Germans had considered that so unlikely they didn’t bother to even protect the steep three-and-a-half-mile-long ridgeline known as Riva Ridge.

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mountain school

Army Mountain Warfare School Ethan Allen, Jericho, Vermont (Personal)

Needless to say, this was a huge mistake by the Germans, as the 10th Mountain soldiers were well-equipped to perform the climb. The attack proceeded flawlessly, taking the Germans totally by surprise. By dawn, the Americans controlled the ridgeline, at the cost of only a single man wounded.

The point of this story is, sometimes, even when the thesis seems perfectly logical and the entire crowd is in agreement, they can still be wrong. As Mark Twain often said:

Whenever you find yourself on the side of the majority, it is time to pause and reflect.

This is exactly the point I feel we are at with regard to Roblox stock. When the bearish rhetoric becomes so overwhelming that the stock sells off by 75%, that’s the first sign it may be nearing a bottom. At a certain point, you run out of sellers. Shareholders who bought in at much higher levels have effectively thrown in the towel and moved on, creating a contrarian buying opportunity in some cases. Here is why.

Contrarian Buying Opportunity Presents Itself

Times of market or stock specific turmoil often present the best buying opportunities for savvy investors. Contrarians find their best investment opportunities during times of market duress or when idiosyncratic issues arise in a company that may soon be resolved. While the herd is panic selling, the contrarian uses this capitulatory action to pick up shares at a discount. Nonetheless, the underlying company needs to have a solid growth story and display some positive sign the bottom may be in. I believe Roblox fits the bill. Let’s take a look.

Current State Of Affairs

Well, when I started writing this piece, Roblox was up 20%. Now it’s still up 14%.

rblx chart

Roblox Chart (CNBC)

Yet, all three indices have taken a turn for the worse, selling off hard over the last couple of hours.

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index perf

Major Market Indices Performance (Finviz)

So, all in all, Roblox stock is still showing extremely strong resilience in the face of an undiscriminating market selloff. This relative strength is a strong tell Roblox may have bottomed. Buy why, you ask? Let’s take a look at the recent encouraging inklings codified from the latest earnings release.

What’s The Good News?

Record Daily Active Users

Roblox shares have rebounded primarily due to the fact the online gaming platform company stated average daily active users rose 28% to a record 54.1 million. Lately, growth in daily active users has seemingly been the primary factor market participants have been focused on.

Record Hours Engaged And Revenue Growth

Hours engaged climbed 22% to a record 11.8 billion, with revenue rising 39% year-over-year to $537.1 million. So, based on these developments, Roblox shares received a boost even though the company posted first quarter results that were weaker than expected. Yet, some analysts said there was potential for an improvement in the second half of the year.

Positive Analyst Remarks

KeyBanc Capital Markets analyst Tyler Parker noted:

“Monetization should follow user growth and engagement, so we’ll be looking for any commentary to instill confidence in the potential return to growth in the coming months.”

Parker also mentioned he sees the Discovery feature may improve monetization as well.

Roblox Discovery

Parker noted that some of the commentary in the Roblox shareholder letter was “interesting,” particularly around monetization opportunities, including the Discovery feature. The Discovery feature shows much promise in regard to improving monetization of engagement. Here’s a link to an in-depth developer video regarding the Discovery features attributes. It appears to me Roblox is down but not out. Not let’s wrap this up.

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The Wrap Up

Look, Roblox is a speculative longshot-type investment, particularly at this juncture in the market. So, when I take a flyer on a position like this, it’s never more than 3% of my entire portfolio. Further, I always layer in to new positions to reduce risk. For this specific position, I have chosen to divide it into three tranches. So, my initial buy in Roblox only represents 1% of my entire portfolio. In other words, I don’t “bet the house” on these types of long-shot contrarian buying opportunities.

Nevertheless, I see Roblox as a viable, growing business that’s not going away. With the market continuing to get crushed and Roblox holding on to gains, I feel confident the stock has bottomed. There’s a fine art to catching falling knives. It entails keeping the position small and layering in overtime to reduce risk. You’ll want to have plenty of dry powder left if the stock continues lower. Moreover, look for some positive sign of a trend or fundamental reversal before taking the initial stab. I was tempted to buy previously at $75, $50, and finally took a nibble when it dropped close to $20. I would be kicking myself if I hadn’t waited patiently. Which reminds me of my overriding mantra, patience equals profits.

Patience Equals Profits

My overriding Winter Warrior investing motto is “patience equals profits.” Take your time and wait for the opportunities to present themselves. Furthermore, do your own deep dive on the name. Do not rely on others or an article like this one to be your only research. Use articles like this as a starting point for your own due diligence. Those are my thoughts on the matter, I look forward to reading yours.

Your Input Is Required!

The true value of my articles is provided by the prescient remarks from Seeking Alpha members in the comments section below. Do you think Roblox is a Buy at current levels? Why or why not? Thank you in advance for your participation.