Roblox: Selling Overdone; Showing Signs of Staying Power

Shares of popular video-game and digital experience platform Roblox (RBLX) fell under considerable pressure following the release of its fourth-quarter earnings results last week, which fell well short of analyst expectations. I am bullish on the stock while it’s in free-fall mode.

Roblox stock tumbled over 25% following the results, steadily sinking even lower in the following sessions. Now down around 66% from its all-time high, many investors are fearful of what evidence of slowed user growth and engagement could entail, and its users continue aging.

Undoubtedly, I was always a bit skeptical when it came to Roblox stock. I noted that it would be very challenging for the firm to continue building upon its success, given its young userbase would eventually grow up and try other more mature options out there in the gaming universe. Most notably, less-than-stellar graphics was a reason I thought Roblox would have difficulty growing up alongside its users.

Roblox Stock Tumbles on Back of Q4 Fumble

As we saw with Meta Platforms (FB) and its weak daily active users (DAUs), investors can be quick to run at the first signs of trouble.

While it was discouraging to learn that the pandemic momentum could not keep up for Roblox, the company is far from reaching a fast-falling userbase. Year-over-year comparables were difficult, and DAUs are still growing at a respectable rate.

While there was a lot of hair on Roblox’s latest result, I do think it wasn’t as bad as to call for such a violent post-earnings decline. However, broader weakness in the equity markets was probably a major contributing factor behind the panic-selling in RBLX stock.

The weaker-than-expected fourth quarter wasn’t too much of a surprise, given the jolt of pandemic lockdowns was likely to fade. What I found most encouraging was the fact that Roblox is continuing to engage gamers older than 13. As of the latest quarter, around 52% of Roblox gamers are now over 13.

Roblox: Growing Up with Its Users?

As the company continues finding a spot with older audiences, I find it can improve its ability to “grow up” with users and retain its dominance.

The sheer number of games and experiences on the Roblox platform will be hard to replicate. The brilliant managers at Roblox can invest heavily in giving its developers more tools to improve upon the experience. The Roblox ecosystem seems impenetrable at this point.

If the firm can continue engaging its users through these more challenging times, I think the moat’s width can increase considerably. Looking ahead, Roblox may have the wind to its back as more attention is drawn to the metaverse and metaverse-like experiences that exist today.

I think the negative reaction to Roblox’s recent quarter was overblown.

Just How Wide a Moat Does Roblox Have?

Roblox probably has the closest thing to a metaverse-ready product, as you’ll find today. Surely, companies seeking to break into the digital worlds of tomorrow are going to want to emulate Roblox. Indeed, Meta Platforms, a firm that’s been known to copy features of its rivals in the social media space, has likely been keeping a close watch on the breakthrough success over at Roblox.

While a firm can copy Roblox’s business model, can it replicate its success? I think it’ll be hard. Roblox has a moat that may be larger than most analysts expect. The firm isn’t just another video game aimed at younger audiences; it’s an experiential platform that takes user engagement to the next level.

Like Meta, Roblox has been met with more than its fair share of criticism, especially with regards to monetization. Still, I think Roblox is many steps ahead of the competition.

To take it a step further, the company may already boast the social experience platform that Meta desires.

The Roblox Flywheel Looks Unstoppable

The more users flock to Roblox, the more experiences there will be, and the greater the potential for users and engagement to grow from here. The bulls may argue that the company has a massive, untapped total addressable market (TAM) that encompasses older teenagers.

The bears would argue that Roblox is just a gaming platform for young kids, and once they grow out of the game, they’ll move on to the types of games that entice older teenagers today.

Personally, I think Roblox has an opportunity to become a generational phenomenon if it can innovate in a way to grow with its userbase. If the company can engage older users, I think the odds that Roblox grows up with its users will increase. While most saw the latest quarter as weak, I saw it as muted, with a side of somewhat encouraging developments.

Could Roblox be the Facebook for younger generations?

Arguably, it already is. Whether it has as much staying power as Facebook is another question entirely.

Wall Street’s Take

Turning to Wall Street, RBLX stock comes in as a Moderate Buy. Out of 11 analyst ratings, there are seven Buys, three Holds, and one Sell recommendation.

The average Roblox price target is $82.90, implying an upside potential of 70.6%. Analyst price targets range from a low of $60.00 per share to a high of $108.00 per share.

The Bottom Line on Roblox Stock

Roblox’s recent earnings miss was not at all what investors wanted. Still, the stock seems oversold and undervalued, given its longer-term potential and encouraging signs that I believe most investors are overlooking at this juncture.

In the meantime, RBLX stock is going to be ridiculously volatile, but I do think nothing much has changed about the long-term narrative.

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