Roblox Analysts, Cathie Wood Defy Pessimism on Stock

Apr 7th, 2022 10:08 EST

(Bloomberg) — Analysts are standing pat with their bullish views on Roblox Corp. even after investors fled, erasing almost $51 billion in market value for the company that’s become a great hope of believers in the potential of the metaverse.

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Citigroup Inc. joined the ranks of the bulls Wednesday, starting coverage of the video-game platform with a buy rating. Of the 23 brokerages that follow Roblox, all but one recommend investors hang on to the stock or buy more, with an average expected return of 54% over the next year, according to Bloomberg data. The stock, though, has dropped 66% from its November high.

That divergence reflects the push and pull in the market between optimists who see boundless profits from the as-yet-unproven virtual reality world, and skeptics who are recoiling from risk as central banks start to withdraw the flood of liquidity that’s lifted all assets. Facebook got a stock-price bump when it jumped on the metaverse trend in October, changing its name to Meta Platforms Inc., only to see the shares subsequently collapse.

Roblox is a key player in the effort to build an immersive version of the internet — where people will be able to interact, play games or work using a digital avatar — because its users are already able to make their own games and worlds using its technology. Yet the company reported disappointing growth in the fourth quarter as the end of pandemic restrictions sent users back out into the real world, and the full promise of the metaverse is still years away.

“That’s a difficult proposition for a growth stock to be faced with,” said Danni Hewson, an analyst at AJ Bell, a U.K. investment firm that doesn’t have a rating on Roblox.

Wood’s Bet

At least one big investor is siding with the analysts: Cathie Wood’s Ark Investment Management, which invests in “disruptive innovation.” The firm bought more stock last month, bringing its stake to about 5.48 million shares — more than double the 2 million it held at the end of last year. In February, Wood said Roblox is one of the best ways to play the metaverse. The firm didn’t respond to a request for comment.

Analysts are still seeing a 29% rise in its first-quarter user base and a moderate growth of 3.5% in bookings, according to data compiled by Bloomberg.

“If they put two more quarters together and beat expectations on key metrics, I think investors will probably climb back in,” said John Freeman, an analyst at CFRA Research, which has a strong buy on the stock and a price target of $107.

Shares of many other firms linked to the metaverse have struggled this year as investors grappled with an unclear path ahead for companies wanting to monetize the platform.

Only four out of the 44 components in the Roundhill Ball Metaverse ETF are up for the year, with Roblox, Meta and Matterport Inc., a maker of software for virtual walkthroughs, weighing heavily on the group. Roblox, which listed on the stock market in March last year, has yet to make a profit.

“There’s plenty to trouble the metaverse, from tightening fiscal policy to the cost-of-living crisis which will impact the amount of disposable income consumers have to spend,” Hewson said.

And in another knock to its investment thesis, Roblox is still expensive at 8.8 times estimated sales for the next year. That compares with established gaming companies Electronic Arts Inc., Take-Two Interactive Software Inc. and Activision Blizzard Inc., which trade from 4.2 times to 6.9 times sales.

“While the firm’s valuation is above many peers, we believe this is justified given firm’s strategic position, rapid growth and healthy pipeline of product enhancements,” Citi analysts including Jason Bazinet wrote in their report initiating coverage on Roblox.

The stock rose 0.3% to $46.02 at 10:07 a.m. in New York.

Tech Chart of The Day

U.S. tech stocks tested a pair of key technicals on Wednesday as shares whipsawed in afternoon trading following the release of the Federal Reserve’s meeting minutes. The Nasdaq 100 Index closed lower by 2.2% on the day after briefly sinking below the 14,400 level, which sits just above the gauge’s 50-day moving average and its intraday low from early October. A break below both levels could put the tech-heavy benchmark on a path back toward the lows seen in March when it entered a bear market.

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(Updates to add shares in last paragraph)

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