Can Roblox stock resist its downward spiral?

Roblox [RBLX] stock has slipped almost 20% over the last month, and more than 40% since it reached an all-time high last November, as the hype from the metaverse-infused high appears  to have dissipated.

However, the social video-gaming platform, whose Roblox game knocked Candy Crush off top spot to record the biggest US mobile game of 2020 in terms of revenue, according to Sensor Tower, has continued to record impressive user growth.

Do strong fundamentals suggest the Roblox stock price is set for long-term gains, and was the hype around the metaverse-fuelled gains realistic?

What’s happening with Roblox stock?

Roblox stock has dropped 19.30% across the last month and 20.00% already in 2022. And, after Friday 14 January’s close at $79.05, has plunged 44.17% from 22 November’s all-time high of $141.60.

However, Roblox stock is still 75.67% higher than its $45.00 direct listing reference price when the firm went public on 10 March last year.

China app setback knocks investor confidence

After Roblox pulled its LuoBuLesi app – created in partnership with Tencent [HKEX:0700] – for the Chinese market last month, it will now be unavailable in China for an undetermined period, reports MarketWatch. The app, which the company said “will form the exclusive basis for growing our penetration in the China market”, now has no imminent prospect of a return, as the “next version of LuoBuLeSi” is built.

Analysts at KayBanc Capital Markets said: “It’s unclear if this is related to the regulatory gaming environment in China or not, but we do see this as an incremental unforeseen headwind to user metrics in the near term.” The note added that “the long-term potential of China remains vast, but this would suggest a slow, iterative process is what investors should expect.”

Fundamentals paint a brighter outlook

Last month Roblox reported a strong set of metrics for November, including a jump in daily active users to 49.4m, up 35% year-on-year, while sales were expected to have jumped between 84% and 87% year-on-year to between $184m and $187m. The impressive growth figures failed to prevent the decline in Roblox stock.

These numbers followed hot on the heels of Roblox’s strong Q3 earnings, which showed a 28% year-on-year rise in bookings to $637.8m, while average daily active users increased 31% to 47.3m. The Asia-Pacific region notably outperformed, with 75% year-on-year growth. Time spent on the platform rose 28% versus the previous year to 11.2bn hours in the quarter, report Investors Business Daily.

Despite some predictions to the contrary, there’s been no sign of Roblox's growth decelerating post-lockdown, with triple-digit sales growth in the first nine months of 2021. Analysts are expecting full-year revenue to soar 196%.

The company's growth cycle could last for a long time, according to the Motley Fool’s Leo Sun, “since its creators constantly create new experiences to attract more players”. He adds that “it's also an attractive platform for companies to launch new metaverse experiences.” Investors and analysts alike will, however, be hoping for a reversal from 2020’s $253m loss, which came despite an 85% rise in daily active users and 82% leap in revenue, to $924m.

Roblox embraces the metaverse

In September, Roblox launched Vans World, an interactive skateboarding world experience and metaverse playground where players can perform tricks and customise Vans gear and apparel with friends. More recently, Nike launched immersive world experience Nikeland on Roblox, where players can enter a digital showroom to dress avatars in Nike gear, and peruse its latest products.

"The metaverse is bigger than gaming," according to Roblox vice-president of brand partnerships, Christina Wootton, reports Investors Business Daily. "We're ushering in this new category of human co-experience … where people can come and connect with one another and have shared virtual experiences."

What are analysts forecasting for Roblox stock?

The 11 analysts offering 12-month price forecasts on Roblox have a median target of $124.00, according to CNN, with a high estimate of $150.00 and a low estimate of $70.00. The median estimate represents a potential upside of 56.86% from Friday’s $79.05 close.

Based on analysts’ recommendations with CNN, eight rate the stock a ‘Buy’, with four ‘Outperform’, two ‘Hold’ and one ‘Sell’ rating, leading to a consensus ‘Buy’ on Roblox stock.

What’s next for Roblox stock?

Analysts expect Roblox's revenue to rise 21% against some “tough year-on-year comparisons” as its net loss widens again, due to high developer exchange fees and stock-based compensation expenses, reports Motley Fool.

The company will need to lower the exchange rate of its in-game currency Robux, as it seeks to boost margins without alienating creators, and ultimately turn a profit. The uncertainties make Roblox “a tough stock to own as interest rates rise”, reckons Sun.

On the plus side, Roblox is “one of the top metaverse stocks to watch”, according to Investors Business Daily’s Scott Lehtonen, and its impressive sales growth bodes well. Amid the current stock market volatility though, and Roblox's share price slide, prospective investors may choose to file Roblox stock in the ‘one to watch’ category.