When Facebook renamed itself to Meta (NASDAQ:FB) it helped lift gaming platform stocks. Roblox (NYSE:RBLX) stock will benefit from Meta’s commitment.
It will expand its reach without Meta’s help. People are spending more time gaming. RBLX stock will attract investors as they discover how the company’s games will differentiate itself from others.
Strong Brand to Lift RBLX Stock
Reality star Paris Hilton will raise Roblox’s brand value when she launches a metaverse business on Roblox. The announcement is nothing new. Gaming firms like Glu Mobile tried to grow their user base by licensing celebrity names in their mobile games. In 2017, Glu said it would scale back on celebrity games. It cost too much in licensing celebrity names on the games.
Tommy Hilfiger launched a digital fashion business for Roblox avatars. Nike (NYSE:NKE) opened Nikeland, a virtual world in November 2021.
Roblox may become 2022’s meme favorite, thanks to an unexpected source. In a disclosure the House clerk made public on Dec. 30, 2020, House Speaker Nancy Pelosi disclosed her positions. The up to $3 million in total bets included a $250,000 – $500,000 bet on Roblox. She bought call options with a strike price of $100 expiring on Jan. 20, 2023. She and her husband have a good track record with investing. The disclosure may attract Reddit users on stock discussion subgroups to copy the trade.
Opportunity
In the third-quarter, Roblox posted revenue growing by 102% year-on-year to $509.3 million. Investors should notice the strong bookings, which increased by a solid 28% Y/Y to $637.8 million. Chances are good that the business momentum will continue into the current fourth quarter and the year ahead. The daily active user base rose by 31% Y/Y to 47.3 million.
Higher engagement on the Roblox platform will lead to better monetization rates. The easing lockdown recently failed to hurt the site. Omicron’s growing spread forced governments to introduce some restrictions. Investors may expect that the easing lockdowns in the months ahead will not hurt Roblox’s growth.
User loyalty is so strong that after an outage in Q3, user activity recovered. Since it did not experience any lasting negative impact on user activity, investors may forecast even strong site visits this quarter. The holiday quarter is seasonally the strongest. Though shares are performing well, it has room to run higher if Roblox posts strong holiday traffic.
Risks
Growing concerns about Roblox being unsafe for children might hurt the stock. Management must assess the risks and proactively enforce rules to prevent child labor exploitation.
RBLX stock valuations trade at unfavorable levels. As the table shows below, the stock scores an 11/100 on value:
Stock Rover uses metrics like price-to-earnings to measure its value score. Investors could consider Activision (NASDAQ:ATVI), which trades at a P/E in the 20 times range. ATVI stock is under-performing because it delayed Overwatch 2 and Diablo 4. Gamers may not see the title release until 2023. Activision Blizard said that after working with new leadership, “it has become apparent that some of the Blizzard content planned for next year will benefit from more development time to reach its full potential.”
Electronic Arts (NASDAQ:EA) has hit game titles like FIFA (soccer) and Battlefield. Just as Roblox posted strong bookings, EA did so, too. Net bookings grew by 27% Y/Y to $7.077 billion.
Social Connections
Roblox focuses on building social connections and engagement. It may offer more than just games. For example, the platform supports group learning or working. Chief Executive Officer David Baszucki said Roblox is a platform that invites people to connect with their friends. Creators and developers will continue developing its virtual economy. Roblox will realize an engagement-based payout the richer its developer community gets.
Baszucki cited that some developers make tens of millions of dollars on the platform. This level of reward will attract more developers to join the Roblox platform. More users will join, spending more time and money. Investors may ignore the weak value score, betting that the growth rate will not slow any time soon.
Fair Value and Your Takeaway
Of the 11 analysts covering Roblox, the average price target is around $117.00 (according to Tipranks). Investors wary of the stock valuation may put more weight on opinions offered by bearish analysts. They have a price target as low as $70.00.
Unity (NYSE:U), a 3D game engine, also pulled back recently. Markets are less willing to pay any price for game developer stocks. Wait for the bearish sentiment to turn neutral before buying Roblox (or Unity).
Users may get bored of playing on the Roblox gaming platform. They may take a break. The quarterly results do not indicate this trend yet. Still, if it happens but new users replace them, Roblox’s overall growth will continue.
On the date of publication, Chris Lau 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.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.
