Stock Analysis & Ideas

Roblox Stock: Is the 80% Peak-to-Trough Drop Overdone?

Story Highlights

Roblox stock continues to take endless hits to the chin as the market sell-off accelerates. The company is investing in its long-term growth profile, but until there’s progress on profitability or evidence of peaking inflation, RLBX may struggle to sustain a rally.

Shares of video-game platform developer Roblox (RBLX) have now shed more than 80% of their value since peaking last November. With inflation and rate hike fears picking up this past week, Roblox stock could easily revisit its all-time lows. The S&P 500 is at a fresh, new low, with growth stocks once again leading the rest of the markets into the abyss.

Though the magnitude of selling seems overblown, unprofitable growth companies could find it difficult to regain their footing until the Fed can reel in inflation. Undoubtedly, it’s not easy to be a growth investor these days, with so many former high-flyers now buried under a growing pile of rubble.

With a modest price-to-sales (P/S) multiple just shy of eight, the $16.5 billion digital experience platform is starting to look a lot cheaper than many of the bid-up defensive dividend stocks that lack on the growth front.

Bottom-fishing in Roblox stock will likely continue to be a money-losing proposition for the foreseeable future. That said, the market seems to be severely discounting the firm’s growth and ability to move into profitability at some point in the future. The company has a unique, growing ecosystem and will be well-positioned to move into the metaverse, when the time comes.

For now, investors want profits today and are less willing to pay for even the most attractive growth profiles. Eventually, the rate-induced “discounting of future growth” will be overdone if it isn’t already. As Roblox continues investing heavily in its business to strengthen its moat, I think it’s hard to be bearish if you’re a long-term thinker. I am bullish on the stock, even as negative momentum accelerates.

On TipRanks, RBLX scores a 1 out of 10 on the Smart Score spectrum. This indicates a high potential for the stock to underperform the broader market.

Roblox Stock: Recession Could Continue to Weigh on Bookings

Roblox got off to a weak start to 2022, with a meager first quarter that saw bookings decline year-over-year. Adjusted EBITDA margins declined to 10.8%, signaling the company is moving further away from sustained profitability.

Despite sub-par profitability metrics, the company continues to fire on all cylinders on the growth front. Further, the ecosystem seems to be getting stronger as the firm makes it more lucrative for developers.

Undoubtedly, more developer incentives could spark next-level user growth as the number of quality experiences increases. While investors want a greater focus on margin enhancement, I do think Roblox is right not to listen to the market. It’s still in full-on growth mode, and such efforts will eventually be appreciated once the firm is ready to transition into profitability.

As Roblox continues driving DAUs (Daily Active Users), the width of its moat will increase. However, with a potential recession on the horizon, per-user bookings could continue to decline, adding to the doom and gloom sentiment already weighing heavily on RBLX stock.

In short, Roblox is investing heavily in its platform. However, investors don’t seem to care much, given that the firm’s margins are not on the right track. Rates have made many investors allergic to growth stocks, even the high-quality growers like Roblox, which has a growth story that’s likely to improve with time.

At the end of the day, you need to spend money to truly innovate and grow. Roblox knows this. Still, investors don’t seem to be forgiving to firms that have yet to shift gears by sacrificing a bit of long-term growth in favor of a nearer-term profitability push.

What Could Indicate a Bottom in Roblox Stock?

Uber (UBER) is one of the firms that’s shifted gears to better appease profit-seeking, growth-shy investors. Other high-growth companies that can’t do much about margin enhancement over the medium term have resorted to stock splits to reignite interest. Indeed, it’s as though share splits are some sort of carrot to lure back jittery investors into a stock.

While such short-term-focused moves may help create some relief for plunging stocks, investors should stay focused on the long-term fundamentals. In terms of growth, Roblox is still flooring it. Although tougher economic times are ahead, the firm is likely to rise out of the next downturn far stronger than it entered.

Add metaverse potential into the equation, and Roblox may be a stock that many are sleeping on amid the current growth slump. Unfortunately, Roblox stock is unlikely to power higher again until the broader market sell-off concludes. It’s hard to imagine such until the Fed has a better handle on inflation.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, RBLX stock comes in as a Moderate Buy. Out of 16 analyst ratings, there are nine Buy recommendations, five Hold recommendations, and two Sell recommendations.

The average Roblox price target is $38.56, implying an upside of 45.73%. Analyst price targets range from a low of $21.00 per share to a high of $61.00 per share.

The Bottom Line on Roblox Stock

Roblox is doing a lot of great things to improve its platform. Such efforts are unlikely to be appreciated by the market soon, though. Investors currently hate growth stocks and will continue to throw in the towel as Robux, -Roblox money- spending falls in the next recession.

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