Roblox stock falls as Wall Street sees ‘Pandora’s box of problems’

Roblox stock falls as Wall Street sees ‘Pandora’s box of problems’

Roblox Corp. stock followed. selling off on Friday as analysts questioned growth initiatives presented at the social media company’s investor day on Thursday’s and August performance that came in lower than expected.

Wedbush analyst Nick McKay, who has a neutral rating and a $34 price target, was a bit skeptical about some of the new features the company offered and said “we think many of their strategies could be a challenge to continued growth at a high rate. “

Read: Is the Roblox metaverse pioneer ready for the tough competition? This analyst does not think so

For example, Roblox executives announced Thursday that they will begin offering new avatar customization, the ability to delete 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 doubt that Roblox’s game engine is strong enough to retain older and more affluent users,” McKay said. “In our opinion, the graphics of the Roblox platform seem to be comparable to those seen on consoles a decade or more ago in some cases, and some of the initiatives it presented on a day seemed to be concepts from other platforms the analyst.”

Roblox is also facing challenges to its game engine from companies like Unity Software Inc. u
said McKay.

“Game engines like Unity are more robust than the Roblox engine, and are just as democratic, which suggests that a company like Unity could undermine Roblox’s business model and share a larger share of revenue with developers than as shared by Roblox,” said McKay. “Since about 70% of all games are currently being developed using Unity, this seems like a potential problem for Roblox.”

Read: AppLovin brings up its quest to merge with Unity Software

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 advertising platform.

“The immersive portal ads, we believe, could open up new creative ways for experiences to monetize and connect with users,” said Uerkwitz. “If done right, the advertising business could be as big as an inexperienced spend.”

“However, we also see a Pandora’s box of potential problems with ads,” Uerkwitz, who has a hold rating and a $43 price target, wrote. “So, we expect Roblox to roll out the product slowly and we don’t see a material contribution in 2022 or 2023.”

Stifel analyst Drew Crum wrote that while August bookings of $233 million to $237 million were in line with seasonality, they were about $6 million below his estimates “and appeared to disappoint the market when the shares were trading off after the disclosure of this metric.”

Bookings, or revenue plus the change in deferred revenue, is important, especially since Roblox recently reported an unexpected drop in bookings, their second consecutive year-over-year quarterly decline. Back in May, when Roblox reported an unexpected drop in bookings, the stock recorded its worst one-day performance since going public.

Crum, who has a buy rating and a $50 price target on the stock, said Roblox’s push to target older users — which is about attracting new users and keeping players who started using Roblox when they were fathers – central to his purchase thesis. Roblox said it increased users aged 17 to 24 by 40% in August.

This group is expected to become Roblox’s largest cohort in the near future,” said Crum. “We see this as important because older kids/adults tend to do better than younger kids.”

How Roblox works: 5 things to know about the tween-centric gaming platform

JP Morgan analyst David Karnovsky, who has an overweight rating and a $53 price target, also said 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 Roblox “made a general comment on margins, saying that with booking growth, profitability could return to pre-COVID levels.”

Meanwhile, Roblox is planning ambitious growth, and that means margin pressure, writes Uerkwitz Jefferies

“The company is focused on 10xing the business,” Uerkwitz said. “This is likely to keep margins under pressure in the short and long term.”

Of the 23 analysts covering Roblox, 12 have a buy rating, eight have a hold rating, and three have a sell rating, with an average target price of $45.06, down from $45.44 recently. Back in June 2021, all eight analysts covering Roblox had buy-grade ratings, which it has achieved for six quarters, according to FactSet data.

Roblox shares are down 61.7% for the year, compared to an 18.7% drop in the S&P 500 SPX index,
and a 26.8% drop in the tech-heavy Nasdaq Composite Index COMP,

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