Stock Analysis & Ideas

Roblox Stock: Too Much Uncertainty Lies Ahead

Story Highlights

Roblox operates in an industry that has a long runway for growth. However, investors need to consider the many challenges faced by the company before investing in Roblox.

Roblox (RBLX) benefited from the Metaverse hype in 2021, causing its stock to skyrocket 200% at one point from its IPO price. However, Roblox is now down almost 60% year-to-date due to fading interest in the Metaverse, the reopening of the economy, and the macroeconomic challenges faced by the tech sector. I remain neutral on the stock as the company navigates a difficult time that’s filled with too much uncertainty.

Recent Earnings Failed to Impress

Despite Roblox’s 38% year-over-year revenue increase to $537.1 million in the first quarter, the company fell short of analyst expectations for bookings and net income. Roblox reported a loss of $0.27 per share in Q1, compared to the $0.22 predicted by FactSet. Average daily active users increased by 28% year-over-year to 54.1 million, but bookings fell 3% to $631.2 million due to a decline in users and hours engaged in its North America segment.

DAUs in North America decreased by 2%, while Europe and the Asia Pacific experienced strong year-over-year growth of 20% and 94%, respectively. The engagement rate in the Asia Pacific increased by 104%, bringing global hours engaged to a record 11.8 billion in the first quarter.

However, in April, DAUs came to 53.1 million, down from 54.1 million at the end of the first quarter. In May, DAUs declined further to 50.4 million, and hours engaged fell to 3.6 billion from 3.8 billion in April, suggesting the company is losing ground as the pandemic boost wanes.

The next Roblox earnings release date is August 9. Many investors are looking forward to Q2 earnings to see whether the company will finally buck the trend and report better-than-expected earnings.

Roblox’s Asian Userbase Provides Strong Growth Opportunities

Although engagement trends began to decline as schools and colleges reopened, the Asia Pacific region’s userbase and engagement remain strong. DAUs in India increased by 160% in the first quarter, which is a promising sign for investors as this is one of the biggest target markets for the company.

The emerging online gaming industry in India has grown dramatically in recent years. According to KPMG, the country has 420 million online gamers, trailing only China. India is expected to become one of the world’s leading gaming markets, with a market value of $3.9 billion by 2025.

This massive growth presents a unique opportunity for Roblox in the most populous region on Earth. Roblox has already emerged as a noteworthy player in this fast-growing market. Because all of Roblox’s gaming and virtual experiences are designed and developed by its users, the company’s platform generates job opportunities by enabling developers to earn money by allowing them to monetize their games.

Gamers spend virtual currency called Robux to buy items such as virtual outfits and avatars in Roblox games, and developers receive 30% of the proceeds generated from a game. Robux can be converted into real money by using Developer Exchange (DevEx).

Given that the company makes most of its revenue by selling Robux, the growing interest in online gaming in new regions will likely boost revenue growth in the coming years.

In addition, the company is focusing on developing new revenue streams such as in-game advertising and sponsored listings. These new monetization techniques seem promising, but everything depends on the company’s ability to attract and retain active users.

Roblox’s Challenges Cannot be Ignored

Bookings on Roblox, which is a close proxy for revenue, have come under pressure in recent quarters, which is not a good sign for investors. On top of this, Roblox is booking massive losses at the operating level, highlighting the company’s inability to bring in a sufficient level of revenue to cover operating expenses. 

Increasing competition in the virtual reality gaming space is another concern. Many big tech companies are eyeing this market to expand their horizons, and Roblox is not in a good position to thwart this threat because of the other challenges the company faces. Losing market share will deteriorate the company’s financial performance and create a negative sentiment toward the company in the market.

Wall Street’s Take on Roblox

Turning to Wall Street, Roblox has a Moderate Buy consensus rating based on nine Buys, seven Holds, and two Sells assigned in the past three months. The average RBLX price target of $37.71 implies 10.8% downside potential.

Takeaway – There are Better Opportunities Elsewhere

The gaming market is well-positioned to grow, but Roblox has to deal with many challenges before making the most of this opportunity. Things are likely to get worse for the company before they get better – if at all. The risk-reward profile of investing in Roblox does not seem favorable for investors today.

Disclosure.

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