Roblox Corp.’s stock continued to sell off Friday as analysts questioned growth initiatives presented at the social-media company’s investor day on Thursday and August performance that came in lower than expectations.
shares fell as much as 11% to an intraday low of $38.81, and closed down 9.2% at $39.50 in Friday trading. The stock was also hit Thursday after the company held its investors day and released August figures, and shares are down 13.2% for the week.
Wedbush analyst Nick McKay, who has a neutral rating and a $34 price target, was somewhat skeptical of some new features the company offered and said “we think that several of its strategies could prove to pose a challenge to continued growth at a high rate.”
For instance, Roblox executives announced Thursday they will start offering new avatar customization, the ability to destroy in-game objects, and in-game voice chat, a non-browser PC format, and immersive ads intended for users older than 13.
“In particular, we are skeptical that Roblox’s game engine is sufficiently robust to enable it to retain older and wealthier users,” McKay said. “In our opinion, the Roblox platform’s graphics seem comparable to those seen on consoles a decade or more ago in certain situations, and several of the initiatives it presented at its analyst day appeared to be already-proven concepts from other platforms.”
Roblox also faces challenges for its game engine from companies like Unity Software Inc.
“Game engines like Unity are more robust than Roblox’s engine, and are equally democratic, suggesting that a company like Unity could undercut Roblox’s business model and share a greater portion of receipts with developers than is shared by Roblox,” McKay said. “Given that an estimated 70% of all games are currently developed using Unity, this seems like a potential issue for Roblox.”
Jefferies analyst Andrew Uerkwitz said that while the August bookings outlook was in-line with his forecast, he was concerned about the company’s plans for an immersive ad platform.
“The immersive portal ads, in our view, could open up new creative ways for experiences to monetize and engage with users,” Uerkwitz said. “If done right, it’s possible for the advertising business to be as big as in-experience spending.”
“However, we also see a Pandora’s box of problems that could arise with ads,” said Uerkwitz, who has a hold rating and a $43 price target, wrote. “As such, we expect Roblox to slowly roll out the product and we don’t see material contribution in 2022 or 2023.”
Stifel analyst Drew Crum wrote that while August bookings of $233 million to $237 million were consistent with seasonality, they were about $6 million below his estimates “and appeared to disappoint the market with the shares trading off following disclosure of this metric.”
Bookings, or revenue plus the change in deferred revenue, are important particularly since Roblox recently reported a surprise decline in bookings, their second year-over-year quarterly decline in a row. Back in May, when Roblox reported an unexpected decline in bookings, the stock logged its worst one-day performance since it went public.
Crum, who has a buy rating and a $50 price target on the stock, said Roblox’s push to target older users — which involves attracting new users while retaining players who started using Roblox when they were tweens — is core to his buy thesis. Roblox said it had increased 17-to-24-year-old users by 40% in August.
This group is “projected to become Roblox’s largest cohort in the near future,” Crum said. “We see this as important because older kids/adults tend to monetize better vs. younger kids.”
How Roblox works: 5 things to know about the tween-centric gaming platform
J.P. Morgan analyst David Karnovsky, who has an overweight rating and a price target of $53, also said both August bookings and daily active users of 59.9 million were below his expectations. While the company did not provide any new forecasts, Karnovsky said that Roblox “did broadly comment on margins, stating that with bookings growth, profitability could potentially return to pre-COVID levels.”
Meanwhile, Roblox is planning ambitious growth, and that means margin pressure, wrote Jefferies’ Uerkwitz
“The company is focused on 10xing the business,” Uerkwitz said. “This will likely keep margins suppressed in the short and long term.”
Of the 23 analysts who cover Roblox, 12 have buy-grade ratings, eight have hold ratings, and three have sell-grade ratings, with an average target price of $45.06, down from a recent $45.44. Back in June 2021, all eight analysts covering Roblox had buy-grade ratings, which it enjoyed for six quarters, according to FactSet data.