Roblox stock price prediction: What’s the outlook amid the tech sell-off? (NYSE:RBLX)

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Summary in seconds

My Investment Rating for Roblox Corporation (NYSE: RBLX) is a sale. I pointed out in my previous update for RBLX published on March 4, 2022 that a significant rally in the stock price for Roblox above $70 is unlikely. In this article, I’ll provide an update on my views on the outlook for Roblox given the continued decline in RBLX’s stock price that has occurred alongside the massive sell-off of tech names.

My prediction is that Roblox’s stock price will continue to decline in the future based on the company’s outlook. RBLX hasn’t set a clear path to profitability, and its bookings growth may not yet have bottomed looking at its May 2022 metrics. Additionally, RBLX’s current valuations are still rich and a further drop in valuation is likely.

RBLX Stock Basics

It is important to have a good understanding of the basics of RBLX stock before discussing recent developments in Roblox. I’m referring to what Roblox does and why it’s attractive as an investment candidate, when I use the term “basic”.

In the “Company Overview” section of the company’s investor relations website, RBLX describes itself as “a human co-experience platform” and “one of the best entertainment platforms in line for the under 18s” which is supported by “developers who produce their own immersive multiplayer experiences.”

In a nutshell, Roblox makes money by monetizing content on its platform with the sale of its virtual currency known as Robux. There are network effects at play here. An increase in the number of users encourages more developers to create new content on the RBLX platform, which helps make the platform more attractive to new users. More importantly, Roblox is a unique combination of a social media platform operator focused on relatively young users and a game company that doesn’t have to develop its own games.

Why did Roblox stock drop?

Roblox’s stock price is down -22% from $46.03 at the time of my previous post in early March 2022 to $35.93 as of June 27. Year-to-date, RBLX shares have fallen -63%, which is attributable to both market-specific and company-specific issues.

Roblox Stock Price Chart Year to Date 2022

Roblox Stock Price Chart Year to Date 2022

Looking for Alpha

According to the chart shown above, the NASDAQ Composite Index, a proxy for the technology sector, has so far fallen -27% in 2022, underperforming the -18% correction in the S&P 500 on the same period. Roblox is a technology company as described in the previous section of the article, and it’s no surprise that RBLX’s year-to-date share price performance has also been lackluster. To make matters worse, loss-making companies have fallen out of favor with investors. Roblox is expected to remain loss-making at the EBIT level through fiscal 2026 (as far as consensus numbers are available) according to sell-side analyst consensus financial forecasts obtained from S&P Capital IQ.

Still, it’s worth noting that Roblox shares have done significantly worse (-63%) than the NASDAQ Composite Index and S&P 500 in 2022 year-to-date, and it’s reasonable to conclude that headwinds company-specific (apart from the fact that loss-making technology companies are not favorable) are also responsible for the weakness in RBLX’s stock price.

On June 15, 2022, RBLX disclosed the company’s metrics for May 2022, and the company’s bookings were in the spotlight. Roblox’s total bookings and average bookings per daily active user contracted 9% to 11% and 23% to 24% year-on-year, respectively, in May. June 16, 2022 Looking for new Alphas An article quoting a research report from Morgan Stanley (MS) pointed out that the deceleration in RBLX’s May 2022 bookings growth was the slowest since the start of the year, confusing investors’ expectations of a rebound from March’s low of -9%.

Previously, Roblox’s key financial and operational metrics revealed as part of the company’s first quarter 2022 results released on May 10, 2022 were similarly disappointing. The company’s Q1 2022 average bookings per daily active user of $11.67 is below the market consensus estimate of $12.16 (according to S&P Capital IQ) of 4 %. RBLX’s YoY revenue growth slowed from +84% in Q4 2021 to +39% in Q1 2022. Roblox Non-GAAP Adjusted EBITDA decreased -64% YoY to 68 million in the last quarter, down 35% from the Wall Street consensus EBITDA forecast of $104 million according to S&P Capital IQ The data.

Easing work-from-home tailwinds and strong capital expenditures were key drivers of RBLX’s weaker-than-expected operational and financial performance for the first quarter of 2022.

In the next section, I go over Roblox’s current consensus price target.

What is the target price for Roblox shares?

The median sell-side target price for Roblox is $40.00 at the time of writing, according to S&P Capital IQ. This equates to a modest +11% upside from RBLX’s last share price of $35.93 on June 27. In other words, the $40 median price target seems to suggest that RBLX is not a buy due to its upside potential.

I discuss RBLX’s stock price outlook in the next section.

Should Roblox Stock Rise?

It’s easy to see why RBLX’s capital appreciation potential is limited, as shown by its median price target for Wall Street analysts highlighted in the previous section.

Even though Roblox shares have fallen -63% in 2022 so far, RBLX valuations aren’t exactly cheap. Based on evaluation data obtained from S&P Capital IQRoblox is currently trading on the consensus price-to-sell for the next twelve months and EV/EBITDA multiples of 7.5x and 48.3x, respectively.

Regarding the company’s business outlook, RBLX had noted during its Q1 2022 earnings briefing that “our year-over-year growth rates (for bookings) in April (2022) were better than they were in March,” and he guided for that “on an annual basis, I expect that to be true in May and again in June.” In other words, Roblox expected year-over-year booking growth to improve month-over-month in May. But that hasn’t materialized, as seen in the 9% to 11% year-over-year drop in bookings for May 2022, as discussed earlier in this article.

At the same time, it seems unlikely that Roblox could become profitable (profit) anytime soon or see an improvement in its EBITDA margins. During the company’s first quarter 2022 investor call, RBLX noted that “in the near term, I don’t think we’re focused as much on maintaining very high P&L margins,” and noted that “the investments that we make, we see very high returns over the long term.” Roblox’s stance on profitability and investments is reflected in the sell-side consensus financial projections according to S&P Capital IQ. RBLX is expected to remain loss-making between fiscal 2022 and fiscal 2026, with EBITDA margins remaining in the low to mid-teen percentage range (compared to 30% during the pandemic) during this period.

In summary, my view is that Roblox’s share price may continue to decline, given weaker than expected booking growth in May 2022 and the lack of a clear timeline to achieve profitability. .

Is RBLX stock a buy, sell or hold?

RBLX stock is a sell. This is justified by Roblox’s poor outlook in terms of expected booking growth and profitability, and its demanding valuations.

Karen J. Nelson