Stock Market

Is Roblox Stock Poised to Rally Soon?

Roblox Corporation (NYSE:RBLX), which enables users to enter virtual communities, known as the metaverse and create the own video games, has many positive attributes and great growth potential. What’s more, its management team appears to be adept both at making lucrative deals and adding captivating, new features to the company’s metaverse. Still, like many stay-at-home names that thrived in 2020, RBLX stock is facing important macro challenges.

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What’s more, despite their recent, sizeable pullback, the shares’ valuation remains quite steep. As a result of the latter two points, I’m currently cautious on the shares.

Roblox Has Many Strengths

Roblox has proven to be very proficient when it comes to attracting consumers to its metaverse and keeping them there. In August, the company reported that its active user base had jumped 32% from last year to 48.2 million

Moreover, the company has been able to monetize those users fairly effectively, as it predicted that its August sales would come in at $219 million to $222 million. In 2020, Roblox’s reported revenue of $923 million, way up from $508 million in 2020.

And showing that it knows how to make very lucrative, highly impactful deals, Roblox announced that it would team up with the giant toymaker, Hasbro (NASDAQ:HAS). Under the agreement, Hasbro agreed to unveil Roblox-inspired Nerf blasters and a Monopoly board game that is based on Roblox.

The deal is likely to generate very high-margin royalties for Roblox that will move the needle for RBLX stock. Also worth noting is that a major cartoon creator, DreamWorks, already launched a Roblox TV series. I’m sure that Roblox is also getting high-margin royalties from that show.

Given the strong popularity of its metaverse, I expect the company to announce many more such deals.

Finally, in September, the company stated that it had added “spatial voice” that enables voice chat on its platform. Basically, it allows certain users to communicate with each other, using their own voices, in specified parts of Roblox’s metaverse.

Many people like using their voices to communicate and find it very easy and natural to do so. Further, there are not very many video game developers that have made voice chat an integral part of their offerings. Consequently, I believe that Roblox’s voice chat feature will, over the long term, make Roblox’s virtual community meaningfully more popular.

Macro Challenges and Valuation

As I’ve written in multiple, past columns, video game makers, along with other developers of stay-at-home products that thrived during the heart of the pandemic, are likely to be hurt by the winding down of the virus. So it’s  unsurprising that Roblox’s daily average users increased only 4% in August versus July. That was a significant deceleration from the 8% month-over-month increase that the company reported in July compared with June.

As the pandemic winds down further, the company could very well report month-over-month declines in some of its user metrics, causing the shares to drop considerably. Making the stock particularly risky in the near-to-medium term is the fact that, despite its recent, steep declines, its valuation remains quite elevated.

Since peaking in June, the stock had tumbled about 25%. Yet the shares are still changing hands for 13.5x analysts’ average 2022 revenue estimate. That’s a high valuation for a company that still generates steep losses, is in a highly competitive sector, and is facing important near-and-medium-term hurdles.

The Bottom Line on RBLX Stock

Roblox appears to be well positioned to become a winner in the long term. But given its near-and-medium-term hurdles, I advise investors to wait for a better entry point before taking a bullish position in the name.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015.?Among his highly?successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at?@larryramer.?