Roblox: Why This Stock Has Gotten Hammered

The rise of the metaverse over the past few months has resulted in a number of stocks absolutely skyrocketing of late. Roblox (RBLX) has been one such stock that has taken off in popularity. As of last November, RBLX stock had surged to more than $141 per share, providing investors with absolutely astronomical growth in a very short amount of time.

However, most of those gains have been given up of late. In fact, RBLX stock is one that’s been absolutely ravaged by the market, down approximately 63% from its peak in November.

With discussion seemingly dying down around the metaverse of late, perhaps this drop is warranted. Or, perhaps macro risks around the Federal Reserve’s strategy to raise the interest rates to curb rising inflation are hurting such growth stocks.

Whatever the case, Roblox appears to be out of fashion right now. Right now, I’m taking a neutral “wait-and-see” approach to Roblox, given these concerns (I think they’re real). That said, I can understand both sides of the argument with this company – it’s fast-growing, but it’s also higher risk.

Let’s dive into what’s driving negative sentiment with Roblox right now.

Investors Overly Cautious with Growth Stocks

Recent years were the perfect time to own growth stocks. High-growth companies like Tesla (TSLA) soared more than 10x between 2020 and 2021. However, the winds in the market appear to be changing. A handful of the market’s biggest gainers during COVID-19, such as Fastly (FSLY) and Zoom Video Communications (ZM), have seen their share prices dip severely during this period of portfolio de-risking.

Why the de-risking? Well, surging inflation is one thing that’s been a pain in the side of the market for the majority of 2022. Persistently high inflation has increased calls for rising interest rates, something the Federal Reserve looks forced to comply with. U.S. Treasury yields are now hovering around highs not seen since the onset of the pandemic, a factor that depresses the valuation of all stocks, particularly growth stocks.

That’s because interest rates, such as the 10-year U.S. Treasury yield, are used as discount rates for valuation models. When this discount rate goes up, the future value of a company’s cash flows declines, as does its valuation. For companies with a higher percentage of their total future expected earnings further out in the future, this isn’t a good thing. Roblox is one such company most would put in this bucket.

Additionally, the recent geopolitical concerns around Russia and Ukraine have shifted the risk paradigm further. Investors appear to be taking a risk-off approach to equities, selling companies with the highest valuations first.

For Roblox, one could argue that the company’s business model is relatively immune to macro events. In fact, should uncertainty continue to pick up, if Roblox is able to continue to grow in this environment, the stock may be rewarded.

That said, Roblox is still losing money on an earnings basis. Positive earnings may take some time to materialize, despite its growth. This is a company that may fall prey to the rate hiking environment, whether its business model is super strong or not. Accordingly, this risk is something many investors aren’t willing to take right now.

Strong Earnings, but Weak Growth

The pandemic has led to this company reporting some solid numbers. In Q4 2021, Robox’s revenue jumped 69.7% year-over-year to $568.8 million. The company also saw a positive free cash flow of $77.3 million, which is definitely a good thing. 

However solid these numbers seem, they were actually weak in comparison to the growth experienced in previous quarters. For instance, the company’s revenue jumped 102.2% and 126.6% during the last two quarters. Moreover, Roblox also reported lower total hours engaged on its platform compared to Q3 2021. These falling numbers are justifiable. 

The pandemic gave growth to this gaming platform over the previous two years. However, as global economies open, users are spending less time on this platform. 

This company’s slowing growth has alerted some investors. This is especially applicable to those who expected the company to continue to maintain its triple-digit growth rate. However, long-term investors may want to remain hopeful regarding Roblox’s future prospects. As the metaverse continues to become more mainstream, Roblox’s platform is one that should generate tremendous growth.

Wall Street’s Take

Turning to Wall Street, Roblox 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 of $82.90 implies 58.7% upside potential. Analyst price targets range from a high of $108 per share to a low of $60 per share.

Bottom Line

Rising interest rates and surging geopolitical conflicts may impact all stocks indiscriminately. Indeed, there may be a solid investment argument for Roblox at these levels.

However, the de-risking the market is undertaking right now provides an environment that may not be very friendly for growth investors for some time. Accordingly, RBLX stock is one that investors should tread carefully with right now or plan on easing into over a longer period of time.

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