They say you should leave emotions at the door when entering the investing game, but Wedbush’s Nick McKay makes no bones about his feelings toward Roblox (RBLX).
“We have a love-hate relationship with Roblox,” the analyst said. “We love the company’s innovation, its first mover advantage, its large and growing user base and its technology stack; we hate aspects of Roblox’s business model, its ownership of its cloud infrastructure, its concentration of young users and its significant stock-based compensation.”
The mixed feelings mean the analyst initiated coverage with a Neutral (i.e., Hold) rating and $28 price target. There’s upside of 14% from the current trading price. (To watch McKay’s track record, click here)
McKay praises Roblox’ “unique online platform” which enables users to “discover millions of immersive experiences.” Through engagement and the sale of virtual items, it also enables developers to monetize their work, while brands are able to “attract the attention” of a younger demographic. In fact, its success-to-date has provided has seen the company lauded as a Metaverse pioneer.
However, with competition in this new world expected to only increase, it is still not clear whether the platform will be “part of the larger Metaverse, or whether it will become a mere niche player.”
One impediment to success could be Roblox’s high platform fees. To support its own financial performance and infrastructure, the company takes almost half of the revenues made by third-party developers. And third-party platforms take another quarter or so. “This leaves the developers with a sub-optimal payout structure in our view,” says McKay, “and prevents many established studios from embracing the service.”
Until Roblox thinks of reducing its own revenue cut for “established audiences,” McKay believes the platform will be “limited in its appeal to existing large games.” And its attempts to diversify its audience demographics will also be “challenged.”
The thing is, even with the high fees demanded from its partners, on a GAAP basis, the company is still unprofitable. Furthermore, annualized at roughly $300,000 per head, the stock-based compensation level is “elevated.”
What will it take for McKay to become more constructive? The analyst explained, “Should the company lower its platform fees, grow more rapidly than we have modeled, lower its operating expenses and/ or lower the percentage payout of its equity-compensation, we are prepared to revisit our recommendation and target price.”
On the Street, 4 other analysts join McKay on the sidelines, 1 implores to Sell but with 9 additional Buys, the stock boasts a Moderate Buy consensus rating. Most analysts appear to think the shares are now trading well below their fair value; at $51.80, the average target suggests the stock will climb 123% higher in the year ahead. (See Roblox stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.