Roblox Stock Halved This Year. These Analysts Say Estimates Are ‘Too High.’

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A wave of metaverse excitement for

Roblox

shares evaporated in recent months amid slowing domestic user growth trends and concerns about profitability. The videogame firm has a big growth opportunity, but Wall Street’s near-term expectations are “too high,” according to analysts at MKM Partners.

MKM Partners analysts Eric Handler and Rohit Kulkarni launched coverage on

Roblox

(ticker: RBLX) stock after the market closed on Tuesday with a Neutral rating and $55 fair value estimate.

The stock fell 3.8% to $48.98 in Wednesday trading. It is down 52% year-to-date and 65% from its November high. The

S&P 500
fell 0.6% on Wednesday, while the

Dow Jones Industrial Average
fell 0.3%.

Roblox is a platform that offers tools for users—many of them children and teenagers—to design and interact in virtual worlds. It is viewed as one of the few existing and successful representations of a metaverse concept because it allows users to shop with its virtual currency—called Robux—for accessories for digital characters on a digital platform that offers games, social experiences, and even live events such as concerts.

“We view Roblox as a unique, interactive entertainment platform (or metaverse) with significant long-term growth potential, but is facing near- to medium-term headwinds causing growth to slow,” the MKM analysts write.

They note its more-than-50 million daily active users, largely in the five-to-24 age demographic, boasts impressive engagement. They think the platform’s long-term total addressable market is one billion people, though their medium-term estimate is roughly 180 million people.

New languages, recruiting overseas developers, and instant chat translation efforts will help expand Roblox’s international user base, according to the analysts.

“In addition, the platform is broadening beyond games to include music and branded experiences, which is helping to attract more teenagers and young adults,” they wrote. “However, these new experiences are still in the early stages of development and have not yet shown an ability to sustain large-scale audiences and most are not undergoing regular updates.”

Still, they don’t think Wall Street is factoring in the likelihood that average bookings per daily active user will decline over the next few years. Bookings is a form of adjusted revenue used by videogame firms. The MKM analysts think Wall Street’s estimates for bookings and adjusted earnings before interest, taxes, depreciation, and amortization are too high, which isn’t helped by the fact that the company won’t give guidance on such figures.

They think Roblox’s shares will remain under pressure until consensus forecasts are revised lower or until average bookings per daily active user or operating expense trends improve.

“As such, while we like what Roblox is building and aiming for, the business model is experiencing growing pains which limits the capital appreciation potential over the next 12-months,” they write.

Write to Connor Smith at [email protected]