Roblox (NYSE:RBLX), the recent direct listing of the online game and user developer platform, could still be significantly undervalued. I believe that it is possible RBLX stock could be worth 30% more, or $92.02 per share, compared to its price on March 15.

Here is how I came up with that valuation. I noted that the company reported a significant growth in its free cash flow (FCF) last year from $14.5 million in 2019 to $411.2 million in 2020. This can be seen in its latest prospectus on page 14.

But, more importantly, the company’s FCF margin also exploded. If we compare FCF to its “bookings” which includes actual revenue with deferred revenue, the total FCF margin rose from 2% in 2019 to 21.8% in 2020. We can use this to estimate its FCF in the next two years.

I believe that this year or next the company’s FCF margin compared to bookings could easily reach 25%. This relates to the fact that a good portion of its deferred revenue turns into revenue and free cash flow over the next two months.

One reason for this is the company amortized a portion of its revenue from selling “durable” virtual items to gamers (like houses and hats) over a 23 month period.

Valuing Roblox Stock

Fortunately, the company recently provided projections of revenue and bookings for 2021, based on an expected drop in bookings and user interaction with Roblox. For example, on March 2, the company predicted that its 2021 bookings would range between $2 billion and $2.125 billion. Assuming approximately 22% of that amount translates into FCF, as in 2020, FCF would reach $454 million.

However, this would contradict what the company projects for 2021. In the March 2 statement, Roblox indicated that cash flow from operations (CFFO), a pre-curser to FCF since it does not include capex spending, will be just $320 million to $340 million. Assuming at least $104 million in capex spending, level with 2020, FCF in 2021 will be $226 million. Even adding back $51 million in listing expenses, adjusted FCF will be $276 million in 2021.

So why do I say FCF will hit $500 million? I believe that margins will rise to 25% by 2022 or 2023. For example, 25% of $2 billion in bookings equals $500 million.

This is from the combination of higher amortization and recognition of deferred revenue as well as bookings growth. Capex tends to stay fairly constant and does not grow as fast as revenue. For example, the capitalization rules for expensing software costs in the income statement relate to when a particular set of code or code projects are now working and used in the platform. I suspect that much of this will be expensed rather than capitalized in 2022 and beyond.

To complete the valuation picture, using a 1% FCF yield, the $500 million in FCF projection produces a market value of $50 billion. This is 30.3% higher than $38.37 billion market capitalization at the time of writing. As a result, the target price 30.3% higher is $92.02 per share.

What to Do With RBLX Stock

Keep in mind that I am not projecting that RBLX stock will hit $92 per share this year. It may very well take over a year. That is because the company may not achieve the 25% FCF margin on bookings until next year or at least on a run-rate basis by the end of next year.

In fact, I suspect you will have a chance to buy RBLX stock much cheaper sometime this year as it becomes clear that FCF will be lower than last year — significantly lower. My analysis above shows that it may drop one-third from $411 million to $276 million.

But by next year and beyond, I suspect that the long-term FCF margins will kick in. Therefore, look for a cheaper price to average into RBLX stock, especially since an FCF drop this year will likely provide such an opportunity. But keep in mind that the company’s long-term value is $92.02 per share.

On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.