Price Plunge in Roblox Presents Opportunity for Robust Gains

Key Points

• Roblox stock price plunge is an opportunity to get in for big gains. A rebound is expected before mid-year. 
• Growth is strong; the only problem is the high bar set by analysts. 
• Free cash flow is growing robustly, allowing the company to improve shareholder value. 

Roblox's NYSE: RBLX price plunge is an opportunity for robust gains because there is no good reason for the 20% decline, and the fundamental factors driving the business remain intact. The only bad news is that revenue growth failed to beat the high bar set by analysts, and the outlook confirms general malaise in the gaming industry. However, malaise aside, the guidance is robust relative to the prior year and aligns with those aforementioned fundamental factors, leading this market higher. The RBLX market may take a little time to regain its footing, but a rebound is likely, and fresh highs could be set by the end of 2025. 

Roblox Has Mixed Quarter: Revenue Grows by 32% and Margin Widens

Roblox had a tepid quarter, but only relative to the high bar set by analysts, and the miss is slim. The company’s net revenue of $988.2 million is up 32% compared to the prior year, driven by 20% booking growth, about 70 basis points shy of the consensus. The significant details are that this company sustained solid double-digit growth in a weak market and is guiding the trend to continue. Other pertinent information includes the 19% increase in DAUs and MAUs and the 21% increase in engagement hours. Those signs of increased leverage will accelerate growth and drive operating leverage as the gaming market improves. 

Cash flow and margin news are also good. The company continues to post GAAP losses, but the losses are narrowing and are primarily non-cash. The cash from operations is growing by 29%, and the free cash flow is up 54% to $120 million. The cash flow and FCF are critical because of their significant impact on the balance sheet. The company built cash and increased short and long-term investments and current and long-term assets while controlling its spending and liability. Assets grew by 16%, liability only 14%, with the net result skyrocketing shareholder equity. Equity is reportedly up more than 200% and will likely continue growing in 2025. 

The guidance is also tepid relative to analysts' forecasts yet still solid regarding the fundamental picture. The company expects bookings to run near $5.2 billion, compared to the $5.3 billion consensus reported by MarketBeat. The figure is weak relative to the consensus forecast, but the company expects 19% growth, sufficient to sustain operations while improving shareholder value, and it may be cautious. 

Roblox Stock Price Realigns With Analysts' Sentiment

The analysts' sentiment trends are positive for Roblox, including increased coverage, a firm Moderate Buy rating, and an increasing price target. The problem is that consensus, while up significantly in the 12, 3, and 1-month comparisons, lagged the price action at the time of the release by 20%. In this scenario, the stock price plunge is more of a market reset, realigning with analysts' sentiment, than anything else. Given the trends, the stock price will likely rebound quickly as the January 2025 revisions lead to the high-end range. That puts the market for RBLX near the January 2025 highs with a chance of setting a fresh three-year high. 

The price action in RBLX stock is alarming for the bulls but not as bad as it looks at first glance. While the market fell 20% in premarket trading, it did not fall below the critical support target at $54.25. That target aligns with the previous trading and consolidation range, a level that needed to be retested to affirm a strong technical outlook. If support is confirmed at this level, RBLX stock price will likely return to recent highs before mid-year. What happens then depends on the Q1 earnings results and guidance updates.