As enthusiasm cools for Roblox (NYSE:RBLX) stock, is now the time to buy? Not so fast.
Sure, this video game developer behind one of the most popular platforms among the tween/teen demographic has had many factors firmly on its side.
Covid-19’s “new normal” sped up its growth level last year and may do so again this year.
Also, as seen from the S&P 500 (NYSEARCA:SPY) making new highs and sitting at an historically high forward price-to-earnings (P/E) ratio, recent concerns about rising interest rates and inflation may be taking a breather.
While the runaway bull market we’ve seen may have more room to run, there’s no guarantee that fast-growing, richly-priced, Roblox shares will bounce back in the near term.
This is expected to be another blockbuster year for the company, with projected triple-digit sales growth. But, as growth slows in 2022, shares could hold steady, or even pull back some more, as investors let the company catch up to its valuation.
Putting it simply, there’s no real rush of jumping in at today’s prices (around $67.50 per share). Given its underlying strengths, I wouldn’t bet against it, but in terms of something that can deliver double-digit gains in the next twelve months, look elsewhere.
RBLX Stock Is Simply Priced Wrong
In the past twelve months, the strength of a stock’s growth story has been able to overcome any concerns more cautious investors may have about valuation.
As long as the company is growing at a high-double digit, or even triple-digit, clip, investors-in-general haven’t been splitting hairs about whether a stock is too pricey.
As a result, we’ve seen names garner triple-digit P/E ratios, as well as mid-double-digit price-to-sales multiples. That’s the case here with RBLX stock. Shares today trade for 18.2x projected 2021 sales ($1.96 billion), and 152x estimated 2021 earnings (43 cents per share).
Now, unlike what we’ve seen with some over-hyped “Reddit stocks,” these rich multiples aren’t entirely irrational. As seen with other tech-based names, its underlying business “crushed it” due to 2020’s unique circumstances.
As our own Matt McCall put it, the company’s cutting-edge platform is one of its key areas of strength. Yet, the lion’s share of its tremendous growth last year and this year came from Covid-19 tailwinds.
In other words, don’t expect recent levels of growth to carry on into 2022 and beyond. Sure, it’s not as if Roblox’s growth is coming to a complete halt post-pandemic. Yet, with its valuation stretched, it’s going to be tough for the stock to make further short-term gains from here.
Wait for a Market Overreaction
Most likely, RBLX stock will tread water over the next few months, but even as its underlying prospects remain strong, there’s still the possibility of the company underwhelming investors.
In turn, this could put downward pressure on shares. For those long today, this isn’t good news. Yet, for those taking a “wait and see” approach, this possible outcome could work in your favor.
If quarterly results fall short of expectations, investors may overreact. This may mean a double-digit sell-off in Roblox. Perhaps even down to its direct listing price of $45 per share.
Yes, even at $45 per share, this would be a richly-priced stock. However, while the stock at that price level would still be pricey, a few years down the road it could look like a “can’t miss” entry point.
I may lean bearish on the stock, due to the high chances its growth slows down considerably in the coming few years, but while growth’s set to slow, it’s certainly nothing to sneeze at.
Sales in 2022 are set to rise by more than 30%. On top of this, the sell-side analyst team at Stifel Nicolaus believes organic growth can reaccelerate between 2022 and 2023, thanks in large part to international growth.
In short, this growth story has legs over the long term. While things may simmer down in the near term, over the next few years, this company could continue scaling up into a massive enterprise.
Bottom Line: There’s No Rush to Buy Roblox Today
The long-term potential for this video game platform remains strong. Covid-19 sped up its growth, which may mean the growth train hits the brakes going into next year. The pandemic may have been its primary growth driver over the past year, but this company’s prospects hinge on more than just stay-at-home tailwinds.
Its future remains bright, but in the meantime, shares could continue to tread water. In short, there’s no rush when it comes to RBLX stock. Unless we see a big pullback, hold off buying for now.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.
