Will Roblox Stock Bounce Back?

Long before Mark Zuckerberg started discussing the Metaverse, Roblox Corporation (NYSE:RBLX) had a vision for a similar concept.

Though founded about two decades ago, Roblox envisioned a virtual world and gaming space that would attract millions of daily active users.

Fast forward to today and Roblox is a global platform where millions of people come together and connect to share experiences in immersive, user-generated 3D worlds.

Now with 65 million daily active users and a vast library of user-generated content, Roblox is among the most engaging platforms for both players and developers.

Still, RBLX share price has struggled over the past year, but is a recovery on the horizon?

What On Earth Is The “Metaverse” Anyway?

McKinsey defined the metaverse as a “3D-enabled digital space” that combines the effects of virtual reality, augmented reality, and other advanced technologies. In this space, people have the ability to virtually live and have personal and business relationships.

In 2021, metaverse was the ultimate buzzword, with the term’s internet searches increasing by 7,200%. The biggest proponent of this idea was undoubtedly Meta Platforms, Inc. (NASDAQ:META). Gartner expects that by 2026, 25% of people will spend at least one hour a day in a metaverse.

The idea further gained momentum at a time when digital currencies were popular. Metaverse is enabled by digital currencies and non-fungible tokens (NFTs). The novelty has significantly faded, though and the fall of NFTs has followed.

This was a setback for the metaverse concept and immersive gaming overall. But, the idea is not dead. Immersive technologies are still on the rise and the time may not be that far when more practical usage increases once again, and persists.

For instance, the availability of more and more VR devices has led to extended reality (XR) technology to pick up pace. The global XR market is expected to exhibit a compound annual growth rate of 22.7% through 2028.

So where does Roblox fit into all this?

How Is Roblox Positioned?

Roblox is essentially a gaming platform that allows users to create and play games. The company’s immersive platform is powered by user-generated content and its platform is seen as an early metaverse project.

Since metaverse essentially means sharing virtual space, Roblox’s platform checks the box by offering users a virtual social gaming experience.

Roblox’s business model largely relies on the free-to-play setup, but only a small portion of players are paid members. 

Still, user engagement is high with the daily active user count rising steadily. As of Q1 2024, Roblox commanded 77.7 million daily active users, which indicates a significant rise compared to the prior year’s quarter (66.1 million) or the period the year before that (54.1 million).  The good results are largely due to rising engaged user hours over the past two years.

With increasing user engagement, annual revenue had been growing at a rapid pace, although the year-over-year growth rates have been choppy. In the first quarter, Roblox posted a revenue of $801.3 million, which represented a rise of 22.3% from the prior year’s period.

However, total costs and expenses have kept pace and sometimes even eclipsed the pace of revenue growth. This has led to the company accumulating hefty losses.

Net losses attributable to common stockholders were $253.25 million in 2020 yet grew to stand at $1.15 billion by 2023. Last quarter alone, the company posted an attributable net loss of $270.60 million.

Fears have grown that user engagement at Roblox is slowing down. Looking ahead, the company is expecting slower growth for the current quarter, as well as for the fiscal year.

For Q2 2024, Roblox expects bookings in the range of $870-$900 million, accounting for a slowdown in April, as the comparisons with last year’s Easter holidays come into play.

For the current year, the expected bookings range was lowered from $4.14-$4.28 billion to $4-$4.10 billion, accounting for the comparative effect of a strong Q4 2023 (which had the Playstation launch).

Will Roblox Stock Bounce Back?

According to 28 analysts, Roblox stock is likely to bounce back higher by 12.5% to a price target of $42.05 over the next 12 months. Their sentiment has improved too with 5 analysts upgrading earnings estimates for the upcoming quarter.

Nonetheless, a slowdown in bookings is a drag on investor enthusiasm. Indeed, any top line slowdown is likely to be viewed poorly given the lack of GAAP profitability.

And mis-steps are likely to be punished severely as evident from when the share price tumbled in after-market trading following the posting of Q1 results.

There is good reason to be concerned given that Roblox faces stiff competition in Epic Games’ Fortnite, which is experiencing some tailwinds

To its credit, the company is trying to find other revenue channels, as was seen with its innovative platform ads. Recently, Roblox made video ads available to all advertisers, which gives them the opportunity to reach the Gen Z audience. Since inception, these video ads have been popular with big brand names.

Finally, on a multiples basis, Roblox trades at 5.91x forward sales, which is not excessive but is quite stretched by industry standards. 

All in all, Roblox appears to be a case of a popular and innovative technology platform with widespread usage but where the financials need to catch up to present a more compelling case for investors.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.