Published: Feb. 16, 2022 at 9:01 a.m. ETBy Jack Denton
With Roblox stock in free fall Wednesday, Wall Street is reevaluating the company’s earnings potential as well as what comes next for a videogame group focused on the metaverse.
Analysts’ conclusions could also have significant implications for Meta Platforms (ticker: FB), the embattled social media giant increasingly betting its future on the metaverse.
Shares in Roblox (RBLX) already were down more than 25% so far this year as of the close Tuesday. The stock has since crumbled more than 17% in premarket trading Wednesday after it reported quarterly results.
Roblox reported record daily active users — up 33% year over year — but its fourth-quarter loss of $143.3 million, or 25 cents a share, disappointed Wall Street, which was looking for a loss of 12 cents, according to analysts surveyed by FactSet.
Roblox’s product is a platform that provides users — for the most part children and teens — the ability to make their own games and online experiences, and allows for online virtual interaction. As such, it is both a video game group and a company at the forefront of the metaverse, which describes emerging platforms and technologies that serve a vision of virtual worlds.
Analysts are divided on what comes next.
Drew Crum of Stifel reiterated his Buy rating on Roblox stock with a target price of $110. Crum’s target implies upside for the stock of 78% based on the Wednesday premarket action in the shares.
“We believe Roblox represents a compelling play on the convergence of content and social, two ‘viral loops’ that provide a mutually reinforcing network effect, and together should drive higher engagement, and hence monetization across its platform,” Crum said. The analyst did note that January saw a deceleration in bookings, an adjusted revenue metric used in the videogame industry, which was a negative sign.
Analysts led by Bernie McTernan at Needham were even more bullish, reiterating their Buy rating with a target price on the stock of $136, implying more than 120% upside from Wednesday premarket levels.
Like the team at Stifel, the group at Needham were positive on Roblox’s brand partnerships, like the one with the NFL, which it views as key to long-term growth prospects.
“Roblox is taking a wait-and-see approach to more directly monetize brand spend on their platform, opting for allowing brands to experiment in an environment with less which down the road will allow for a greater monetization opportunity from their massive engagement,” McTernan said.
It was a more bearish picture at Benchmark, where Mike Hickey reiterated his Sell rating with a target price of $70. Roblox closed above $73 Tuesday, before earnings, so Hickey’s target at the time implied 4% downside.
Hickey’s outlook on the company highlights a number of existential concerns that go beyond Roblox and into the metaverse, including the future of these platforms as the days of strict Covid-19 pandemic restrictions come to an end.
“We are cautious the pandemic pulled forward growth, and normalized behavior may dampen outlier engagement trends,” Hickey said. “The metaverse platform was a social utility during the pandemic, in our view, which could unwind as social restrictions are now removed, schools stay open, and parental spend reallocates.”
Moreover, Hickey struck a cautious tone in describing how the depth of virtual worlds can also usher in threats to users in the metaverse, especially among children.
“We are not convinced that Roblox offers a safe play environment and worry over the potential for child abuse,” Hickey said.
More specifically on Roblox, Hickey outlined a business risk that parents — who are likely the ones actually paying for the product — are not connected to the company and could “throttle back spend,” with children happily switching to other games.
The company has some ambitious growth initiatives, Hickey added, but the investment bank is cautious about the ones that extend beyond core game play. The analyst also said that at some point Roblox likely will have to increase developer exchange fees, pinching margins, and that its growth opportunities in China now look more gloomy.
Write to Jack Denton at jack.denton@dowjones.com
