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Stock Analysis & Ideas

Roblox Stock: Top Metaverse Play is Way Oversold

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Roblox stock has been beaten down more than 80% from its highs as margins erode and user growth slows pace in the face of a recession. Despite the headwinds, Roblox remains a top metaverse contender that may have a wider moat than you’d expect.

Co-experience platform developer Roblox (RBLX) is arguably one of the best metaverse plays on the public markets today. Its stock has been crushed, surrendering all of the 2021 gains and then some. From peak to trough, shares lost more than 80% of their value. More recently, the intriguing gaming stock began gaining traction, now up almost 100% from its June low.

Though daily active user (DAU) growth remains robust, with engagement also on the right track, Roblox’s EBITDA margins are not on the right track. The firm is investing heavily in its future at the expense of the attractiveness of near-term margins. I think that’s the right move, as competition in the “co-experience” world could surge once the metaverse is ready for prime time.

Roblox is a remarkable success that’s created quite an impressive flywheel for itself. To increase the speed of its flywheel, it needs to invest in its developers and the capabilities of its platform. The metaverse may be many years off. However, when it is ready for the masses, Roblox could face a wave of hungry rivals looking to replicate its success.

Indeed, many may be inclined to view Roblox as a mere video-game developer. It’s so much more. I consider the company a pioneer. It appears to be a glimpse of what people should expect from the metaverse (or whatever we’re to call it) of the near future.

With a discounted valuation and a market likely to enjoy substantial growth over the next 10-15 years, I am incredibly bullish on the stock.

Roblox is Still in Growth Mode

Roblox may still be growing its user count, but the growth rate has slowed considerably in recent quarters. This slow of pace (and the negative margin trajectory) likely has investors souring on the stock as interest rates drive the economy into a potential recession or slowdown.

Still, I think economic storm clouds are mostly to blame for Roblox’s downfall. Underneath the hood, Roblox continues to do a lot of things right. Once the recession comes and goes, I think the co-experience firm will be tough to stop as more users are introduced to digital experiences possible with virtual or augmented reality.

Looking ahead, I’d look for Roblox to invest heavily in tools for its developers to create next-level experiences for its users. With a strong balance sheet and over $800 million in cash, the firm may wish to pursue acquisitions to help bolster engagement.

Last year, Roblox acquired gaming chat platform Guilded, which could help bolster its co-experience ecosystem. Indeed, Roblox isn’t just about gaming; it’s focusing on a market that’s far broader with room for incredible growth.

Roblox Has the Moat to Compete with Meta

Roblox’s moat lies with its developers and users. Such a moat may be difficult for Meta (META) to break into, even as it invests heavily in metaverse software. While the metaverse as Meta Platforms sees it may be many years away, Roblox has the platform that Meta wishes to replicate.

Meta Platforms acquired Crayta, a game development platform less popular than Roblox, just over a year ago. Though Crayta holds a lot of potential, it could prove challenging to beckon in engaged Roblox users who may be stickier than many expect.

As digital experiences (think concerts, games, and hangouts) become increasingly popular, Roblox could have the means to reaccelerate its growth. There will be many rivals in the race to the metaverse. However, I wouldn’t discount Roblox’s ability to innovate its way into the new realm.

Between Meta and Roblox, I’d take Roblox every day of the week.

Roblox is More than Just a Game

Roblox shows that the metaverse (or omniverse) isn’t just about gaming. It will be a place of work and play. In the play category, Roblox has shown that digital experiences could be a major draw of audiences that wouldn’t classify themselves as gamers.

The advent of game-streaming and the rapid rise in the mobile-game market has made a gamer of many of us. Still, it’s the presence factor that makes Roblox’s co-experience approach so fascinating.

For younger audiences, Roblox has become the place to hang out with friends. Many analysts may dismiss Roblox as just another video game that young users will pass up on when they grow up.

Roblox has done a great job of attracting older teenagers and young adults as well. As the platform continues to improve, it’s not too far-fetched to think that Roblox can grow up with its young userbase.

It won’t be an easy task, but when you think of Roblox as a place to build experiences, it becomes more apparent that Roblox isn’t just another immature game that kids will ditch once something that looks better comes along. Roblox’s graphics have never been a source of strength, to begin with!

Wall Street’s Take on RBLX

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 $38.41 implies 22% downside potential.

Analyst price targets range from a low of $21.00 per share to a high of $57.00 per share.

Takeaway – Roblox Has the Most Metaverse Momentum

Roblox stock boomed and busted. With so much recession risk already baked in, I think the 13.5 times sales multiple is a bargain, given Roblox seems to have the most metaverse momentum of all firms aiming to dominate the digital worlds of the future.

Disclosure

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