Roblox isn’t dead, but the metaverse is

Key Points

• Roblox is in melt-up mode, with analysts shifting gears and raising price targets. 
• Excessive capex is ending, and a path to improving free cash flow is visible. 
• The stock is still range-bound but on track to test the range top and possibly break out in 2024. 

The metaverse may be the shortest-lived buzzword in stock market history. It came seemingly out of nowhere, became so hot that Facebook changed its name to Meta NASDAQ: META, and then it went away in the blink of an eye. Because it came and went so fast, you’d think that metaverse pure-plays like Roblox NASDAQ: RBLX would be belly up, but it isn’t. It’s doing better than ever. 

What happened? What happened is the kind of hype that prices in every possible dollar a market can make. Think cannabis and EV startups, but this bone had even less meat than others. The takeaway is that Metaverse is just another way of saying the Internet. The internet already does what the metaverse was supposed to do: connect people; we don't also need a Metaverse. The Internet will live forever, but the metaverse’s death was assured right from the start. 

What the Metaverse tried to offer, what Roblox does offer, is a means to interact with others via the internet. While there are many potential use cases, the number 1 always has been and always will be entertainment and gaming, where the Roblox platform shines. It provides an avenue for gamers to interact entertainingly and has begun to resonate with the analysts. 

Analysts shift gears: Roblox upgraded to Moderate Buy

The FQ3 results were better than expected and point to increasing leverage for the company. Hours of engagement, monthly unique users, and average daily users grew at a 20% pace, while user spending held flat compared to last year. 

While losses continue to mount, the increase in users and margin strength led to considerable margin and cash flow improvement, which the analysts have picked up on. The company’s net cash flow is up nearly 70% YOY, and free cash flow is positive compared to last year’s shortfall. These improvements are expected to stick because the company has almost completed its newest data center and is not likely to spend as aggressively in the coming years. 

Analysts’ activity was mixed earlier in the year, helping to keep the market range bound, but a shift began in October and is turning into a trend. Several upgrades, including one following the Q2 release, have been compounded by a string of boosted price targets, which have the market for share prices advancing. 

The consensus target is lagging behind the market but trending higher, with analysts leading it. The latest activity suggests a  move into the $45 to 450 region, which takes the market to a new one-year high and within easy reach of a multi-year high. Among the upgrades is one from Wells Fargo, which set a $49 price target, $1 shy of the high. They view Roblox as an audience platform with a robust economy, not gaming pureplay, and expect to see it generate healthy ad revenues over time. 

Roblox gives long-term guidance at shareholder event

Roblox hinted at a period of margin focus, cash flow and free-cash-flow growth in the Q3 release, bolstered by long-term targets offered at the investor day event. CFO Michael Guthrie says the company targets 20% annual user growth and 100 to 300 basis points of margin expansion for the next three to five years. The company also plans to start issuing regular quarterly guidance in Q1 2024. 

The technical action is promising and shows the lift generated by analysts and positive expectations. Notably, institutional activity also aligns with the bottom and rally. The institutions were selling early in the year, but the balance of activity shifted to the buy-side in Q3 and persisted into Q4. 

The market for RBLX is up more than 50% in the last two months and is on track to retest the upper limit of its trading range. If the market can break to a new high, it will bring the $80 level into focus. That target is extreme and may need additional catalysts that may come with the Q4 2023 or Q1 2024 earnings release.