Here’s the No. 1 Reason You Should Avoid Roblox Right Now

IPO investing has gotten considerably harder. While it still affords investors an opportunity in companies like Roblox (NYSE:RBLX), it’s not necessarily the same system it used to be. RBLX stock went public about a month ago on March 10 and has done well since — up about 10% from its opening print.

A child playing Roblox on a smartphone.
Source: Katya Rekina/ Shutterstock.com

Here’s the thing, though. Private investors are shoveling money into startups long before they go public. While many of these startups do fail, some blossom into wonderful companies and unicorns (private companies with a valuation above $1 billion). 

In the past, companies have gone public to get additional funding in order to fuel growth. Now though, many of these companies have all the access to capital that they need. Instead, they’re going public in an effort to raise capital and allow their early investors an exit strategy. 

This has created a mixed situation for regular investors. 

On the one hand, these businesses are more mature, so they tend to be more stable. However, many of the best growth years are already in the past, so it also removes some of that big-time growth potential that comes with an IPO offering. 

With RBLX stock, the company makes a great product — a cutting-edge game. But does it have enough catalysts to continue higher?

Why We Like Roblox

First and foremost, almost all investments boil down to growth, operations and product quality. As almost anyone with kids can attest, Roblox makes a quality product. They’ll also tell you how popular it is, which points to growth. 

For a more accurate representation of its growth, we’ll also look at its revenue. 

Consensus expectations call for sales to more than double this year, then grow about 24% next year and 26.5% in the following year. Obviously 100%-plus revenue growth is a huge attraction for growth investors. However, the drop to “just” 24% growth is a bit of an issue, at least when it comes to the valuation.

Make no mistake, back-to-back years of roughly 25% revenue growth is impressive. However, we’re talking about a company that’s forecast to generate just under $2 billion in sales this year. 

That leaves the stock trading at around 20 times this year’s revenue, as RBLX stock commands a market capitalization of about $39 billion. Trading at roughly 15.5 times next year’s revenue is more palatable, but it’s still not cheap. 

After some initial delays, Roblox finally went public via a direct listing in March. Originally expected to price around $45 per share, the stock opened more than 40% above that mark at $65. Up from that level now and this stock is clearly in favor among the bulls. 

That is often the case with IPOs and new public listings. However, once the dust settles, more shares come to market (increasing the share count) and momentum wanes, these IPOs tend to give investors a better buying opportunity. 

At this valuation, that’s what we’re opting to wait for. Obviously the company has solid growth expectations and strong momentum. But at this valuation — particularly vs. other successful game makers — it’s simply too rich at this price. 

Bottom Line on RBLX Stock

Daily chart of RBLX stock
Click to Enlarge
Source: Chart courtesy of TrendSpider

On the plus side, Roblox is profitable. That’s not something that many young companies can claim, but Roblox can. Analysts expect 48 cents per share in profit this year and 25% growth in 2022 to 60 cents a share. 

Granted it’s not robust profitability, but the fact that there’s any is an impressive feat in my view. 

Ultimately, it’s important to buy quality, but the price we pay does matter. We can’t simply pay any price for RBLX stock and hope to sell to a higher bidder down the road. We need to be a bit more prudent and calculated than that. 

So while we like Roblox, we’re holding off for now. 

Currently, RBLX is settling into a wedge pattern, with a series of higher lows and lower highs. Traders will need to see which way this one breaks before determining a short-term direction. 

If it’s higher, a run back toward $75-plus could be in play. If it breaks lower, perhaps that double-bottom area near $61 will be in play. A break of $60 is where things get interesting, as it may allow for a larger correction and one that puts an opportunity in front of longer-term investors. 

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 this article.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now.


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