Roblox Stock Price Prediction: Buy RBLX, price action not convincing though

Update March 25: Yesterday I said I thought Roblox was worth a small investment and I continue to believe so. However, the price action on Thursday is not helping bullish sentiment. Yes, Roblox is up on Thursday at $65.26, a gain of 1% but it is struggling and has been ignored by the meme stock crowd who are chasing AMC and Gamestop higher. Stability is the goal for a long term investment so stick with this one.

Roblox shares have remained strong since their listing earlier in March with initial gains to $80 being scaled back, but RBLX has for the most part held the $70 level. Roblox shares had a reference price of $45 for their listing as the company went direct rather than the more familiar IPO route.

Roblox is a social gaming phenomenon with hundreds of millions of players globally. The company is looking to expand its offering into entertainment, toys and other social gaming aspects. RBLX has what it terms "experiences" that are built by developers and used by hundreds of millions of players globally. Roblox was set up in 2004 by David Baszucki and Erik Cassel. It has over 8 million developers and average daily users of 37 million, according to Reuters. Roblox is based in San Mateo, California.

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Roblox stock forecast

Roblox certainly has impressive growth numbers as the global lockdown increased its target teen and tween playing group. If the outlook given by Roblox is achieved it will be an impressive rate of growth.

Roblox aims for daily active users to grow by over 60% and revenue to grow by over 100% for Q1 2021 YoY in its most recent outlook. 

These figures are impressive, but Roblox trades at a very high valuation relative to peers in the gaming industry. While it may be revolutionizing social gameplay and its ability for spin-off revenue may yet to be fully tapped, this high valuation represents a problem in the current environment. High growth stocks command high valuations, but in a potentially inflationary environment these same high growth stocks tend to struggle. The US 10-year and University of Michigan inflation expectations index are all flagging higher interest rates and inflationary pressure, despite what the Fed may say. 

Stiefel recently issued a bullish note on Roblox, giving it an $85 price target. It does make and explain well the impressive growth figures achievable by Roblox. Certainly, the game looks to be another social phenomenon, capturing the zeitgeist. My only issue is social phenomenons can come and go quickly. In this case though, I am going to overlook those concerns. Roblox is quite established. Opportunities for added revenue creation grow as social monetization grows. We are likely only at the infancy of the whole monetization of social gaming platforms, and Roblox is one of the biggest if not the biggest. Roblox already has its own digital currency, Robux! Parents will no doubt be familiar with Robux as the second currency in their household and the number one currency of their children.

Roblox's savvy management and growing user and developer base should mean it is able to respond quickly to shifts in user behaviour. This means it will be able to identify and capitalize on new revenue generation ideas. There is an element of how Facebook developed in the Roblox story. Q4 numbers are not yet confirmed but are due for release in March. Income grew from $312 to $488 million from 2018-2019. This was the infancy stage of Roblox, but growth will speed up rapidly. 

Roblox has $810 million in cash on its balance sheet and no debt! Yes, the valuation is high with a P/E over 200, but this has just gone public and has growth rates near 90% for revenues. I wouldn't put the house on it, but Roblox is definitely worth some investment. The risks I see are general market bearishness as yields rise, which has dragged on the tech sector. Roblox may get caught up in these headwinds. But I still expect the stock to strongly outperform all benchmarks for the medium to longer term.

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