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Roblox: Concerns Leave Morgan Stanley on the Sidelines

Despite missing expectations in its recent quarterly report, Roblox (RBLX) sounded upbeat about the current quarter’s growth trends.

The Street liked the noises made around April bookings which also came in better than Morgan Stanley’s Brian Nowak’s expectations. With year-over-year comps easing significantly from May onwards, Nowak now anticipates YoY bookings growth will “accelerate” over the course of the quarter, and with schools closing for the summer break in June, it is likely to be the quarter’s best month.

“As we move in 2H,” Nowak said, “the magnitude of the reacceleration will remain the first key debate, while investors will likely continue looking for evidence that some of the innovation/new product offerings (spatial voice, avatar marketplace, layered clothing, etc) are driving both sustained and faster engagement as well as monetization growth.”

The main question for Nowak is whether the growth can counter the big investment in the developer community, which is set to pressurize margins.

In Q1, there was a significant uptick in Developer Exchange Fees, which now represent 23% of bookings. Nowak thinks this is down to ongoing spend on “engagement based payouts to drive new experience creation.” Management has said it intends to keep on investing in the developer community, and as such, moving forward, Nowak anticipates DevEx will “remain elevated.”

Another element which Nowak thinks investors are increasingly focused on concerns stock-based compensation (SBC) and its impact on dilution. This is especially pertinent for companies with meaningful equity grants/options which might have to resort to issuing “incremental stock to retain/attract talent.”

In Q1, Roblox reported ~$112 million of SBC; this amounts to 18% of bookings compared to 13% for the full year 2021. Considering the likelihood SBC could remain elevated for longer, Nowak’s model now factors in ~5% dilution a year for 2022/23.

To this end, Nowak’s rating stays an Equal-weight while the price target is lowered from $32 to $27. This suggests shares have downside of ~10% from current levels. (To watch Nowak’s track record, click here)

On Wall Street, Nowak is amongst a vocal minority; 5 other analysts remain on the sidelines while 1 implores to Sell. However, with an additional 9 Buys, the stock claims a Moderate Buy consensus rating. The average price target is a more upbeat one too; the figure stands at $40.94, leaving room for ~37% share appreciation in the year ahead. (See Roblox stock forecast on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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