In the past few months, we’ve seen several high-profile companies go public. One of note is Roblox (NYSE:RBLX) stock. Going public via a direct listing on March 10, the gaming app opened at $64.50 per share, well above the $45 per share it sold for a few months prior, in a private financing round.
But, that initial pop was only the start. Since then, the stock has trended higher, and now trades for around $74 per share. There’s no denying that Roblox has a cutting-edge platform in its hands. Plus, with its app benefiting from the Covid-19 lockdowns, 2020 was a banner year in terms of growth.
The underlying business itself looks promising. But, valuation is a concern. Sure, with its high levels of growth, this is a stock deserving a premium valuation. Yet, richly-priced out of the gate, it may be best to take a “wait and see” approach with this recent initial public offering (IPO).
Eventually, as enthusiasm for the stock fades, shares could pull back from their recent sky-high prices. At a more optimal entry point, this could be a great long-term opportunity.
RBLX Stock and Its Cutting Edge Platform
What do I mean when I refer to Roblox’s platform as “cutting edge?” There are scores of free-to-play gaming apps out there. But, there’s a unique element to this one. A factor that both enhances the user experience, as well as provides the company with another revenue stream.
I’m talking about the ability for users to craft their own experiences in the game. Not only that, said users can sell their creations to other users, with the revenue split between the user/developer and Roblox.
This element has played a role in its success. However, Covid-19 related tailwinds have been a more material factor. With schools operating virtually, and outdoor activities canceled, teens and tweens (Roblox’s target demographic) have had few options outside of video games when it comes to entertainment.
As a result, this platform saw a tremendous boost in demand. Sales in 2020 soared 82% from the prior year, to $923 million. With tremendous growth like this, it’s understandable why investors have given RBLX stock such its current frothy valuation. But, at today’s prices, shares are running a bit too hot right now. With the prospect of growth slowing as the outbreak fades, shares could pull back, after their big rally following the direct listing.
Why It’s Best to Wait for Lower Prices
It’s understandable for a fast-growing company such as Roblox to command a rich valuation. Yet, even when factoring in growth, it’s hard to justify current forward price-to-sales multiple (around 20.2x, based on 2021 revenue estimates). Sure, with “growth at any price” the market’s mantra in 2020, valuation concerns weren’t a big deal. But now, following the late February pullback, it’s going to be tougher for “story stocks” like this one to continue benefiting from runaway multiple expansion.
Especially as it’s still uncertain to what extent growth will slow, once things “return to normal.” Again, the pandemic by itself hasn’t been the sole factor behind its record growth. But, with so much of it driven by the “stay at home” economy, we may see things slow down in the coming year.
I don’t see this as a complete deal breaker for RBLX stock. Even if top line growth cools, it’s still going to be at a healthy clip. With long-term trends on its side, even as we return back to the “old normal,” expect this platform to continue to scale up. As it’s still investing heavily in its growth, bottom line results will remain low. But, once it scales up, and can take its foot off the gas, expect this to become a high-margin business.
Investors today are pricing this as if it’ll see 2020 levels of growth in 2021. However, underwhelming results in the coming quarters could reverse this stock’s current upward trend. But, for those taking their time, this may pave the way for a more optimal entry point.
Bottom Line: Sit Things Out for Now with Roblox
There’s big opportunity here for this gaming platform. It saw a tremendous demand boost in 2020, as lockdowns limited entertainment options for its target demographic (teens and tweens). But, with the expectation of vaccines paving the way for a return to the “old normal” in late 2021, Roblox’s blockbuster growth could slow in upcoming quarters.
If results fall short of expectations, this stock, currently still running hot, could pull back. That’s bad news for those chasing it today. But, good news for those waiting sitting on the sidelines for now.
Bottom line: prospects remain bright for this mobile gaming platform. But, it’s best to wait for IPO-related enthusiasm to fade before buying RBLX stock.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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