Volatility On The Rise For Roblox Shares
We recently saw some coverage of Roblox (NASDAQ: RBLX) that led us to believe it could be a great play for the 2nd half. The story suggested a recent pop in share prices was due to increased retail chatter that may lead to a short-squeeze, it even suggested Roblox could be a meme stock but we don't think so. Based on our perusal of the information at hand, and forgive us if we’re wrong, the chatter in retail chatter is far from bullish. If we’re reading the market right, it is betting on a decline in share prices due to a lack of earnings, a failure to pay dividends, and a lack of true relevancy in the gaming world. The metaverse is a great idea but it’s yet to take hold of the market.
The Analyst's Sentiment In Roblox Is Slipping
While there is a possibility of a second-half rebound we’re not betting heavily on it and neither are the analysts. The analyst's consensus rating has slipped to a Hold from a Buy over the past year and the price target is slipping with it. The Marketbeat.com consensus price target is offering a 16% upside relative to the recent price action but it’s a tenuous target at best because it’s down nearly 50% over the past year and trending lower. The bulk of the most recent commentaries has the stock trading in the $20 range which is a loss versus the $37 to $38 it is trading for now. Assuming the second half is tepid or worse, the downward trend in sentiment will continue.
The analysts aren’t expecting much from the FQ2 report and we think the company could miss the target anyway. The company has been having trouble monetizing its users due to their age groups and limited cash flow and older users are slow to join. Add to this a slow-down in discretionary spending and we see the company standing on shaky ground with an uncertain audience. In our view, the $635 million in expected revenue isn’t the problem, it will be the cash burn and expected quarterly loss which isn’t expected to improve. Weak revenue will only compound the issue.
Headwinds For Roblox Are Mounting
There are some headwinds for Roblox's share price that may keep it from moving higher in the near to short-term. Starting with the institutions, their support is strong at 68% but there hasn’t been any significant buying with shares trading at the all-time low. We view this as a wait-and-see period for the institutions that is compounded by the high short interest. If the company can’t produce better results or give a better outlook the shorts and a reversal in institutional activity could push the price down to new lows very quickly. Roblox next reports earnings in mid-August.
Turning to the chart, the price action in Roblox is showing some signs of bottoming but we have some reservations. The stock is extended and ready for a rebound but still well below resistance at the 150-day moving average. That level is compounded by potential resistance at the $53.65 level which has been important to price action in the past. If Roblox can’t get above that level and maintain it, we see the stock moving sideways while the bulls and bears play tug-of-war.
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