Traders who’ve held shares of online entertainment platform Roblox (NYSE:RBLX) have done well overall since the company went public. Yet, RBLX stock has been frustratingly directionless in the past couple of months.
Roblox is a promising company as it offers gamers an immersive virtual world and an escape from reality for a while. This was strongly appealing last year as people sought entertainment during the novel coronavirus pandemic lockdowns.
Fast-forward to mid-2021, when vaccines have been widely distributed and lockdowns have largely been lifted. Will Roblox be able to retain its relevance?
It’s a valid concern, and at least one notable Wall Street analyst is treading cautiously. The best assessment, then, may be to set a lower buy price for Roblox shares, and wait patiently.
A Closer Look at RBLX Stock
The shares began trading at $64.50, much higher than the reference price of $45. The momentum continued until the stock reached a 52-week high of $103.87 on June 2.
Unfortunately, traders who chased RBLX stock near the $100 area were soon punished for their haste. Throughout most of June and July, the stock flopped around and struggled to find a direction.
As of July 23, Roblox shares were trading in the $82 area. At the same time, the company had trailing 12-month earnings per share of -$1.47.
Value-focused investors probably won’t like that negative number. Hopefully, Roblox’s per-share earnings can cross over into positive territory sometime in 2021’s second half.
And if you’re looking for a buy price for RBLX stock, there appears to be some support at $65.
Numbers in Decline
Roblox’s critics may be concerned about a potential drop in user engagement as the world recovers from the Covid-19 pandemic.
That concern seems to be confirmed by the numbers.
In June, Roblox revealed that the company’s daily active users (DAU) declined 1% month-over-month in May.
Not only that, but Roblox’s bookings per DAU were estimated to be down 2% to 3% year-over-year.
Is it a coincidence that RBLX stock has declined since that data was released? I’ll let you decide, but it’s certainly ominous.
In any case, it’s likely that Benchmark analyst Mike Hickey was aware of these issues when his firm initiated coverage of Roblox with a “sell” rating and a $75 price target.
Reportedly, that’s Roblox’s first sell rating as well as the lowest price target on Wall Street.
Now, I wouldn’t recommend dumping your shares, or avoiding RBLX stock altogether, just because an analyst has issued a bearish call.
But then, it’s reasonable to consider Benchmark’s justification for issuing the “sell” rating. You can always decide for yourself whether to heed or ignore it.
Fighting for Relevance
For one thing, Hickey asserts that the recent rally in RBLX stock “has more than effectively priced in” the company’s growth opportunity.
He may have a point there. While the share price didn’t rocket higher in July, the post-direct-listing returns have been substantial.
In other words, RBLX stock may have gone up too much, too quickly early on. If the stock is now “rolling over,” that’s not necessarily a good sign.
Moreover, as I alluded to earlier, Roblox’s relevance in a post-lockdown world might be waning.
Roblox’s platform “was a social utility during the pandemic, which could unwind as social restrictions are removed, schools reopen and parental spend reallocates,” Hickey explains.
Additionally, Hickey cites strong competition and shifting demographics as factors which could also stifle growth.
I suspect that “shifting demographics” is a polite way of saying that Roblox’s young users might outgrow the platform and move on to more adult-oriented platforms soon.
The Bottom Line
Investors can choose to listen to Hickey and other analysts, or not.
But when they’re making valid points, it makes sense to at least hear them out.
In the case of Roblox, the platform could lose its relevance in the gaming community.
Therefore, even if you believe in the company, it’s perfectly OK to wait for RBLX stock to decline before taking a position.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.