Roblox share price falls out of favour ahead of earnings

Share price momentum from doubling revenue in Q3 dissipated in early 2022 as the Roblox share price was sent reeling after a short-seller call cited alleged child pornography on the platform. However, analysts are forecasting strong player growth for the upcoming quarter.

The Roblox [RBLX] share price has come under pressure amid a broad decline in social media stocks. As the social-gaming company prepares to report its fourth-quarter (Q4) earnings on 15 February, analysts are optimistic that it is well-positioned to benefit from expanding player growth.

The still unprofitable Roblox is tipped to report a 49.8% hike in revenues from the previous quarter to $763.1m for the three months ended on 31 December 2021, according to Zacks Investment Research. Analysts polled by the platform expect earnings to also be unchanged from Q3 and estimate another loss of $0.13 per share.

The Covid-19 pandemic has proven to be a healthy tailwind for gaming stocks as lockdowns saw an increase in people taking up the hobby at home. David Baszucki (pictured), CEO of Roblox, noted that people of all ages from across the world spent more than 11 billion hours on the platform during Q3. “Engagement is our north star,” he said in a statement alongside the results.

With the emergence of the Omicron Covid-19 variant in November 2021, demand is expected to be healthy, especially with the help of metaverse partnerships. Ahead of the Super Bowl in the US, Roblox announced on 9 February that it had sealed a deal with the National Football League (NFL) to launch NFL Tycoon — a metaverse video game where players can build football stadiums and manage a professional team.

News of the tie-up sent shares in Roblox up 9.3% in the following day’s trading session. The move is welcome given that the stock has been reversing since its IPO in March last year — the Roblox share price has fallen 1.7% since then to $68.32 on 14 February.

Roblox shares reverse growth

The video game stock had peaked in November 2021 off the back of strong Q3 results. Following a post-earnings jump of 42.2%, shares in Roblox continued to race to a 52-week high of $141.60 during intraday trading on 22 November last year.

Investor sentiment had been driven by the 102% year-over-year leap in revenues to $509.3m during the three months ended 30 September 2021. The growth was fuelled by market-beating booking figures, which were up 28% at $637.8m, and a 31% year-over-year jump in average daily active users to 47.3 million. Players also engaged a total of 11.2 billion hours on the platform, an increase of 28% year-over-year. However, the company’s net loss widened to $74m from $48.6m.

The stock’s growth trend began to reverse in early 2022 following the shutdown of the Roblox gaming platform for three days near the end of last year, which caused a loss of booking revenues and reputation. A tie-up in China with gaming giant Tencent [HK:700] to create an app called LuoBuLeSi has also struggled, with the service being put on pause in December. These fears have been compounded by the general market move away from high growth tech stocks towards value. As a result, the Roblox stock price reached a 52-week low of $53.63 during intraday trading on 28 January.

Further downside pressure arose in February over concerns about the impact of video games on children, which is particularly relevant to Roblox as half of its players are under the age of 13. The Bear Cave, a short-selling newsletter founded by Edwin Dorsey, had raised issues concerning alleged child pornography on the platform in early February and took a short position against the stock. “Parents, investors and regulators seem to have turned a blind eye. If that changes it could pose a serious risk to Roblox,” Dorsey wrote.

Metaverse momentum

Ahead of the company’s Q4 earnings announcement, the Roblox share price is up 3.7% since the start of February (through 14 February). The stock has been boosted by Cathie Wood’s ARK Invest snapping up around 729,000 Roblox shares on hopes that the group will be a winner in the metaverse, which Wood sees as a multitrillion-dollar opportunity.

Bank of America Securities analyst Omar Dessouky agrees. The analyst gave the stock a ‘buy’ rating and an $84 price target, citing an “attractive, multi-year bookings and cash flow growth trajectory... as the business continues to evolve from a primarily US-centric gaming and social experience to a global network with a multitude of use cases”. Roblox has had tie-ups with the likes of Gucci Garden, where avatars are able to look at the fashion house’s designs and even buy products.

Looking ahead to Q4, analysts at Stifel predict Roblox will announce 16% year-over-year growth in bookings, a 30% increase in hours of “engagement and a 32% increase in daily active users. They believe that user growth among older Roblox players — ages 13 and up — will outpace overall user growth, rising 48% year-over-year.