Will Roblox Stock Go Up?

Gaming platforms must constantly evolve to keep users engaged. In the current environment that means crafting a massive ecosystem where users can interact with both each other and the platform. User-created gaming (UCG) has also become immensely popular, and some speculate that future gaming platforms will operate much like YouTube does now.

That’s exactly the niche Roblox (NYSE: RBLX) would like to fill, and there’s no denying the platform’s popularity. During the pandemic, the company’s leadership reported that over half of American children under the age of 16 had interacted with the Roblox platform. But over the past few years, the company has struggled to keep that momentum going.

RBLX is up 3.7% over the past year, but the stock took a massive hit after the company reported earnings for the 2nd quarter of 2023. Roblox shares dropped by over 20% in August mainly because revenue didn’t meet expectations. The 3rd quarter, on the other hand, delivered much-needed positive news for the company.

Increases in daily active users (DAU) and revenue revived RBLX from its 52-week low of $24.88 to where it currently trades at around $38 per share. The company worked hard to improve its margins, expand its demographic, and beef up its UCG offerings. However, it’s too early to tell if the 3rd quarter’s improved financials will carry forward or fade away.

So is Roblox stock a buy?

What Made Roblox Stock Drop?

In November of 2021, Roblox stock jumped over 40% in one day and topped out near $135 per share. That optimism was short-lived, though, as Roblox struggled in 2022 like most tech stocks. Revenue and user growth have been solid, but not exciting enough to entice investors who fear that the platform was just a fad.

Those concerns came to a head in the summer of 2023. Roblox reported $781 million in revenue, which underperformed the analysts’ estimate of $785 million. Net loss per share was $0.46 compared to the forecast of $0.45 for the quarter. The underperformance fueled speculation that Roblox was indeed falling out of fashion.

There have long been concerns about the company’s inability to expand past the under-16 demographic. But despite lagging revenue, Roblox increased its DAU by 25% year-over-year in that quarter. Those users also spent much more time on the platform (nearly 14 billion hours) than the year prior.

Unfortunately, more time spent on the platform didn’t equate to more sales earned. Average revenue generated per DAU was down 3% year-over-year.

Will Roblox Stock Go Back Up?

That was one of many things Roblox turned around in the 3rd quarter. Average revenue per DAU was flat from the previous year. Revenue of $713 million outperformed last year by 38%, though it was still a drop from the previous quarter. More importantly, revenue outperformed estimates by 2.3%.

Net loss per share was $0.45 compared to the forecasted $0.51 loss per share. The company boasted 70.2 million DAU, up 20% from the same quarter of 2022. While most of those users are from the US and Canada, Roblox saw strong adoption in Europe and East Asia during the quarter.

The company’s improved bottom line was attributed to a reduction in expenses across the board. Roblox has mostly completed the construction of its $400 million data center in Ashburn, Virginia. Better infrastructure should streamline operations and prevent downtime on the platform, like the 73-hour blackout that cost the company $25 million in 2022.

The completion of the data center project and expense reduction had an impact in the 3rd quarter. The company’s free cash flow jumped from a deficit of $67.7 million last year to a positive $59.5 million by the 3rd quarter.

Will Roblox Stock Go Up?

According to 28 analysts, Roblox stock is likely to go up by 23.7% to fair value of $4.91 per share.

Increased revenue, DAU, and profits led most analysts to endorse Roblox stock with 21 assessing it as a Buy.

Three of those analysts forecast that the stock will outperform the market over the next year, and could go as high as $60 per share. That’s a 57.8% increase over where RBLX currently trades.

RBLX has four Hold ratings and three analysts who label it as a Sell. The lowest forecast predicts Roblox shares will plummet by 44.8% to $21.

Is Roblox Stock Undervalued?

The analysts seem to believe that Roblox shares will bounce back over the coming year. The stock is currently trading at 9.7x sales, which is an indicator that RBLX may be undervalued. At least compared to the tech industry at large.

The main consideration for Roblox investors is whether the company will be able to deliver continued user and revenue growth. The company has been on a mission to increase its content aimed at older users, including games with romantic themes, increased violence, and cruder humor for the mature demographic.

The company has also battled Fortnite for a stake in the growing user-developed gaming segment. The two companies are working to put game-creation tools in the hands of users. The idea is that users will post their own games the same way users post video content on YouTube.

Is Roblox Stock a Buy or Sell?

Whether the company can expand its demographic and/or build its niche in UCG is still up for debate. It’s worth noting that Roblox has been able to grow its DAU by 20% in each of the past two quarters. And revenue lag in the 2nd quarter was corrected in the 3rd, which should be a positive sign for potential investors.

All in all, Roblox offers a unique opportunity for investors hoping to buy in on the future of gaming. If UCG takes off the way many expect it to, the analysts’ consensus of a 23.7% increase may very well come to fruition.

Still, Roblox didn’t deliver the gains investors hoped for in 2023. And the company faces stiff competition from Fortnite, among others, for market share. So it’s not quite clear how things will play out for Roblox stock in the short-term.

If we were to summarize the concerns for investors they would be weak gross margins, net income is forecast to decline this year, lack of profitability over the past twelve months, and it’s trading at high revenue and book multiples.

On a positive note, sales are forecast to grow this year and so this is really a bet on that top line being sustained.

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