Is It Time To Game The Roblox Market?

Key Points

• Roblox had a solid quarter but failed to inspire a rally. 
• User metrics grew by double-digits but the market wanted more. 
• The drop in share prices may not be over but a solid bottom is in sight. 

Roblox NASDAQ: RBLX had a tough quarter in Q2, and the headwinds may not have ceased, but the results are no reason for the stock to fall 20%. The results were tepid relative to the analysts' expectations but reveal mounting leverage for when consumer spending habits shift.

The problem facing Roblox today isn’t its operations or business quality but pressure building on consumer spending habits that may curb strength over the next few quarters. The takeaway is that shares of Roblox are trading 20% below the pre-release price on a knee-jerk reaction to the news.

Weak hands are selling their shares, bought near the bottom of a trading range supported by analysts and institutions. 

The analysts haven’t had much to say in the first few hours since the Q2 release. The trend in sentiment ahead of the release is mixed with some up and downward revisions to sentiment and price target, but the takeaway is favorable to shareholders. The consensus of 24 analysts is Hold with a price target of $40.

That’s about 33% above the current price action and near the middle of the trading range dominating the price action. The institutional activity also aligns with the trading range, with net activity favoring the bulls over the past 12 months. Assuming these trends continue, the stock should find a bottom soon and may rebound by the end of the year. 

Roblox Gains Traction In Weak Environment 

Roblox had a tough quarter but made headway on critical metrics, including user growth and engagement across all age groups and demographics. The company reported $680.8 million in net revenue, a gain of 15% compared to last year.

The gain is driven by $789.69 in bookings, up 22% compared to last year and 35 bps better than the Marketbeat.com consensus figure. 

The top-line strength was driven by a solid 25% increase in daily average users, offset by a 3% decline in bookings. The deleveraging is not good and is expected to weigh on results for the remainder of the year, but user growth is more important over the long term.

With daily active users and average monthly unique players rising at near-20% and above 20% paces, the company is positioned for leverage when spending habits (consumer and business) shift. Engagement, another sign of leverage, is up 24%. 

“We continue to drive high rates of organic growth in DAUs, Hours, and Bookings. We are growing among users of all ages and across all geographies,”  said David Baszucki, founder and CEO of Roblox.

The margin news is less favorable. The company’s expenses rose across the board, leaving the net loss nearly double compared to last year. The mitigating factor is that much of the increase is attributable to infrastructure spending and R&D, which both support the company’s long-term trajectory.

Factoring those increase out of the question, the company’s loss would have narrowed even with increased costs in other areas. 

The Technical Outlook: Roblox Is At the Bottom, But Range Bound

The price action in Roblox is at the bottom relative to the post-IPO implosion and metaverse hoopla but trading within a range. The range has dominated the action for 18 months and may continue for the next few quarters at least.

The post-release action has the market down sharply but still well within the range and above critical support levels. Critical support is near $25; a move to it will most likely result in a confirmation of support or an outright rebound. 

If not, the market could continue lower, but that is not expected. Roblox is facing headwinds but building long-term value for shareholders. The short interest would be much higher if that weren't the case.

As of the last report, the stock is running a relatively low 3% short interest, and the availability of shares for shorting is low. This isn’t a hot growth market now but a solid wait-and-see-what-happens market with a promising future.