Stock Analysis & Ideas

What Makes Roblox a Risky Investment

The crisis in Eastern Europe is pushing oil and gas prices to record levels, so traders are rightly trying to seize the moment by amplifying moves in energy stocks. Aside from energy stocks and other commodities, including precious metals, the rest of the stock market is currently in the red.

Among the sectors that are doing very poorly is the communication services sector, which has lost more than 5% over the past month. Headwinds spare almost none of the companies operating in the industry, with many, like Roblox Corporation (RBLX), reporting significant losses.

The San Mateo, California-based online gaming platform operator and game creation system provider has plummeted nearly 42% over the past three months.

There could be even more headwinds for this stock going forward due to increasing competition and concerns about the negative impact of online leisure activities on minors.

I see the future of this stock as very uncertain, so I am bearish on this stock.

Q4 2021 Results

Although the company delivered a substantial year-over-year increase of almost 84% in total revenue to $570 million for the final quarter of 2021, its income statement ended with a net loss of $0.25 per share, missing the median consensus estimate by $0.13.

Booking numbers also fell short of analyst expectations, as they expected these to be nearly $775 million, while Roblox reported bookings of $770 million.

Financial Condition

The company’s financial health isn’t bad, with total cash on hand exceeding total debt by almost 2.5 times, giving it peace of mind for a while. In short, this situation is reflected in an Altman Z-Score index of 3.93, which means the company is in safe zones.

The company needs to focus on making a profit that grows over time to maintain its financial health, and it won’t be easy.

Operations for the trailing 12 months ended Q4 2021 resulted in a negative EBITDA of $326 million.

Threats to Online Video Game Demand

Chinese tech giants Alibaba (BABA), Bytedance, and Tencent (TCEHY) have released a new low latency streaming standard to improve the user experience when streaming videos on mobile platforms.

By reducing the traditional delay from three to six seconds to less than one second and making the transmission much timelier, the new standard will significantly increase the demand for streaming events such as sports competitions, online courses, or live e-commerce events.

This new trend could weaken much of the demand for online video games, creating a strong headwind for Roblox and other similar companies as China is known as the motherland of online leisure.

Roblox and other online video game operators may face some drastic restrictions in the next few years due to targeted measures that various nations are planning to address the social plight of video game addiction.

In fact, the World Health Organization recently officially recognized gaming disorder, or video game addiction as an addictive behavioral disorder.

Shares could suffer a major setback if Roblox joins Western sanctions on Russia’s economy, as a lack of sales in Russia after the service shuts down would further hurt the profitability of its international platform.

Wall Street’s Take

For the past three months, 11 Wall Street analysts have issued a 12-month price target for RBLX. The company has a Moderate Buy consensus rating based on seven Buys, three Holds, and one Sell.

The average Roblox Corporation price target is $82.90, implying a 82.2% upside potential.

Conclusion

The company must make its activity profitable. Otherwise, the stock has no chance to recover. It’s not easy, as there are too many factors that can hinder and complicate the mission.

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