Roblox (NYSE:RBLX) roared out of the IPO gate mid-year, but shares languished for two full quarters after the initial burst. The lack of momentum gave traders little reason to pay attention. But this week, everything changed. The company reported better-than-expected earnings, sending buyers on a rampage. So today, we’re going to map out an attractive way to grab triple-digit returns on RBLX stock.
While I don’t usually dwell on a company’s fundamentals, the dramatic response to this week’s report demands further investigation. It’s not every day a stock leaps 42% in a single bound.
RBLX Stock Earnings Dazzle
For the third quarter, Roblox lost 13 cents per share on revenue of $637.8 million. The sales increase continued the company’s streak of triple-digit growth. Revenue was up 102% year over year. Last quarter it had grown 127%. Fears that the economy returning to normal would hurt demand and daily traffic for video games have been laid to rest. The company revealed over 47.3 million average daily users for the three-month period, which is 31% higher than the year-ago period. It’s also 9.5% above last quarter’s 43.2 million.
Investors also got a taste of how the first month of the fourth quarter has been going with user engagement. Daily active users rose 43% year over year during October, setting the stage for an excellent finish to 2021.
Whether or not you find these stats compelling doesn’t matter near as much as the fact that the market loved them. Bullish fundamentals and positive sentiment provide a powerful backdrop to the gorgeous technical breakout taking place. Let’s take a closer look at the price action.
The Big Picture
The weekly time frame nicely sums up Roblox’s time as a public company. Short of one failed breakout (and the current successful one), there hasn’t been any movement of note. If you want an easy explanation for its failure to generate momentum in its first six months, how about this? Roblox came public at such a high valuation ($41 billion) that it needed time to grow into its rich share price. With over two quarters now beneath underneath its belt and growth numbers heating up, the Street finally saw fit to kick-start an uptrend. If the momentum persists, chart watchers should finally have some continuation patterns develop in the weeks ahead.
It will be a welcome change for a stock that has thus far given little reason to trade it.
Before drilling into the daily chart for more detail, let me remind you of the implications when a stock blasts to a fresh record high.
First, every short seller is experiencing more pain than ever before. This gives a strong incentive to buy to cover.
Second, all shareholders have more profit than ever before.
Third, anyone who previously sold RBLX stock is now wishing they hadn’t.
Fourth, new buyers are scooping up shares at a higher price than anyone has ever been willing to pay.
Every one of these reasons supports trend continuation.
RBLX Stock Options Trade
On the daily chart, prices are rocketing higher above a now rising 20-day and 50-day moving average. But, perhaps the most bullish omen is how well prices digested the sharp selloff on Wednesday. It’s uncommon to see such a sharp decline (prices were down 13%) after such a mighty gap and run on earnings. But buyers stepped up quickly at the gap area, reaffirming the new trend.
While future rallies may not be as explosive as this week’s, the odds certainly favor higher prices here over lower.
I like both bull put, and bull call spreads. Here’s a more aggressive play using the latter.
The Trade: Buy the 10 Dec $105/$115 bull call spread for $3.50.
Consider it a bet that RBLX stock rises to $115 by expiration. If it does, you can potentially make $6.50. The max loss is $3.50.
On the date of publication, Tyler Craig was LONG RBLX. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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