Stock Analysis & Ideas

Roblox Stock: Making the Right Investments

Shares of popular video-game platform firm Roblox (RBLX) can’t seem to catch a bottom lately. The formerly red-hot pandemic darling saw its stock shed over 82% of its value from peak to trough as fears of higher interest rates caused investors to take profits across the broader basket of unprofitable growth companies.

Video-game stocks, in particular, have been facing waning demand amid the economic reopening. The return to normal life has meant fewer hours spent on popular video games, including Roblox. Though it is noteworthy that Roblox has proven stickier than most other games.

A return to pandemic-era lockdowns is doubtful at this juncture, given the tools to better manage future outbreaks of COVID-19. That said, it’s likely just a matter of time before time spent on games picks up again, perhaps going into the winter months.

Further, it’s important to remember that we still are in a pandemic, even though it seems like we’ve made a shift into an endemic. With that, one can’t rule out a return to at-home entertainment should a more virulent variant of COVID-19 strike in the near future.

Roblox Stock is Finally Starting to Look Cheap

With Roblox forecasting net losses to continue over the “foreseeable future,” RBLX stock is likely to remain in the penalty box as we move closer to the next round of Fed interest rate hikes. These days, investors simply will not have firms with steepening losses and waning demand in the core of their portfolios.

That said, Roblox is no longer the same pie-in-the-sky “growth at any price” type of stock it was last year. If anything, the selling has likely been overdone, with the stock now trading at a modest 9 times sales.

Given a lack of profits and potential headwinds that may not be so quick to dissipate, it remains a challenge to value Roblox. Ultimately, it’s the rolling over of inflation and a calming down of the Federal Reserve that could stage a bottom for those battered shares of Roblox.

With investors increasingly jittery over the possibility of a Fed-induced economic recession, Roblox shares could face even more downside in the quarters ahead. Still, the bar is now set ridiculously low. The only question is, when will this market begin to reward companies for actually performing better than analyst estimates?

Despite prominent headwinds that could cause Roblox to miss the mark in future quarters, I remain bullish. The long-term growth story still holds, and when gaming demand normalizes, companies like Roblox could be in a spot to deliver the biggest upside surprises.

Roblox Misses the Mark in Q1, but There Were Promising Takeaways

Roblox’s first-quarter numbers were not great, but they weren’t abysmal either. On the profitability front, adjusted EBITDA margins sunk to 10.8%, thanks to various investment efforts and higher payouts for its developers.

Though the margin trend seems bleak, it is worth noting that investments (such as those enhancing safety for its users and bigger rewards for developers) will translate to greater growth over time.

It’s the increased developer payout that could increase the speed of Roblox’s flywheel. Richer payouts for developers mean a greater quantity and quality of experiences. That’s key for user engagement.

With margins and profitability prospects sinking, it’s not a mystery as to why investors have been so quick to ditch shares amid the Fed’s tightening cycle. Investors want profits now. For the firms that aren’t generating a profit, they want to see promising margin trends, or at the very least a long-term plan to push into sustained profitability.

At this juncture, it seems like Roblox is pushing itself further away from profitability with its recent spending. Though profitability prospects seem bleaker today, I’d argue that the company is right to be making the investments it has been making. The firm needs to grow and can’t let the Fed dictate how it allocates its capital.

Roblox is still in full-on growth mode. Investors may not appreciate such, but, in due time, the stock will reach a level that appreciates the longer-term growth story, which remains fully intact.

On the global DAU (Daily Active User) front, Roblox is still running strong, with DAUs rising to 54.1 million, up 28% year over year, but missing the analyst consensus estimate of 55 million.

Wall Street’s Take

Turning to Wall Street, RBLX stock comes in as a Moderate Buy. Out of 15 analyst ratings, there are nine Buys, five Holds, and one Sell recommendation.

The average Roblox price target is $42, implying an upside of 32.2%. 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 clocked in another tough quarter that unveiled less-than-promising profitability trends. Still, the company is making the right investments, and the stock should be rewarded once investors appreciate growth again.

First-quarter bookings dropped 3%, thanks in part to less-favorable comparables. If the economy falls into recession, bookings could erode further as discretionary spending falls. Roblox may not be out of the woods yet, but its stock has already taken on so much damage that it may not take much to spark a reversal.

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