Stock Analysis & Ideas

Roblox Stock (NYSE:RBLX): Ad Expansion Plan Could Reaccelerate Growth

Story Highlights

The metaverse trade may have gone bust, but Roblox could be a pioneer as the digital worlds of tomorrow grow to incorporate ads. Though Roblox stock is picking up negative momentum, shares seem too cheap relative to their improving growth prospects.

Shares of Roblox (NYSE:RBLX) have been a major mover of late. The stock surged higher over news that the firm was getting into online advertising. The big news came just over a week after Roblox announced its intriguing collaboration with high-end durables retailer Williams Sonoma (NYSE:WSM). Indeed, more firms could discover the power of advertising and marketing within Roblox-powered digital worlds. In due time, Roblox’s ad service could take the firm’s growth prospects to the next level.

For now, investors have cooled on the news, with shares back on the retreat over more rate hike fears and stubborn inflation data. With Roblox stock plunging over 16% over the past week, I think it’s hard to be anything but bullish on the firm as it continues to evolve its business model before our eyes. I remain incredibly bullish on Roblox stock, even as shares look to revisit lows not seen since May 2022.

Roblox Stock: Back on the Retreat Following Downbeat Cowen Rating

Roblox stock’s recent bout of negative pressure came courtesy of broader market woes and a fresh “underperform” rating from Cowen. Doug Creutz of Cowen sees “true metaverse” as 5-10 years away. Further, Creutz sees a significant pick-up in competition when the metaverse is ready for mainstream audiences. Very solid points.

Though the metaverse may be many years (or a decade) away, Roblox continues garnering impressive user growth in its current state. Undoubtedly, Roblox may already have the metaverse in the palm of its hands, at least through the eyes of younger people who continue to spend ample time on the platform, either as creators or gamers.

Undoubtedly, Roblox is continuing to funnel money to sustain its growth and improve user engagement. Such efforts could continue to push profitability away from the firm in a rising-rate environment. In any case, I think Roblox is right to continue investing heavily rather than giving into the desires of Wall Street.

The recent move into the ad business could be a key pillar that improves fundamentals until the “true metaverse” is ready to go. In the meantime, analysts and investors are becoming less excited by the metaverse by the day.

The Metaverse Trade Has Gone Bust — but for How Long?

Shares of Meta Platforms (NASDAQ:META) are near new 52-week lows — a signal that the metaverse trade is all but over. As Roblox looks to cross paths with Meta, there could be a war for ads in the metaverse brewing.

At this juncture, I’d give Roblox the advantage, given its loyal user base and foundation that could prove difficult for Meta to replicate.

Still, Meta has done a great job of replicating the success of rival platforms (think Reels vs. TikTok). Regardless, Roblox’s moat may be too wide such that tens of billions in expenditures may not be enough to draw users over.

Should Roblox’s ad business improve upon the firm’s profitability prospects, Meta may very well double down on its metaverse ambitions. Such a scenario could easily reignite metaverse hype, even if the Fed doesn’t look to cut rates after inflation is brought back down.

Though “true” catalysts for Roblox and other metaverse pioneers may be a few years away, I wouldn’t yet throw in the towel on Roblox stock. Its ad business could take a while to pick up meaningful traction. Regardless, it’s tough to pass up on the growth potential at today’s modest valuation multiples.

At writing, Roblox stock trades at just north of 10 times sales. That’s still not cheap, but for a company that’s able to age (and grow) alongside its mostly young user base, I consider Roblox to be one of the better metaverse plays for your buck.

Sure, the magnitude of metaverse hype experienced in 2021 will not be quick to return. However, the next metaverse boom could accompany real fundamentals that cannot be ignored by the growth and value crowds.

What is the Target Price for Roblox Stock?

Turning to Wall Street, RBLX has a Moderate Buy consensus rating based on eight Buys, seven Holds, and two Sells assigned in the past three months. The average RBLX stock price target of $43.53 implies 18.7% upside potential.

Takeaway: Hype or No Hype, Roblox Continues to Innovate

The metaverse hype may have died down, but Roblox is still putting its foot on the gas to take control of the future’s digital worlds. When the “true metaverse” goes live is up for debate. Regardless, Roblox sees itself as the future of the metaverse. Given its impressive growth and innovations, I’m inclined to agree. In the meantime, expect Roblox to face amplified volatility based on Fed chatter and coming inflation data.

Disclosure

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