Roblox: The Bottom Just Fell Out of the Metaverse

Key Points

• Roblox's good quarter is overshadowed by high expectations and weak guidance, resulting in a 30% stock implosion. 
• The company is growing and building leverage, but the stock may not rebound soon. 
• Expect analysts to provide a headwind for stock prices with downgrades and lowered price targets. 

There were high hopes for Roblox NYSE: RBLX going into the Q1 release, and they were shattered on the rocks of reality. The reality is that the metaverse, as neat as it sounds, just isn’t producing the accelerating growth that market participants had come to expect. The last report, Q4 2023, provided hope and pointed to much stronger results than were reported for Q1. The Q1 results aren’t bad but are far short of expectations and compounded by even weaker guidance that has deflated the market.

The upshot is that Roblox may now trade at a reasonable level. The market is down 30% from the pre-release level in pre-market trading and is still above critical support at the bottom of its trading range. The market may fall another 10% to retest the bottom, but support is expected to be as strong at this level as it has been. The risk is that RBLX shares will fall to a new low, opening the door to a deeper decline that could shave another 50% off the price. 

Roblox's Good Quarter Falls Far Short of Expectations

Robust bookings figures from Q4 led the market to expect a significantly larger growth spurt in Q1 and 2024. The Q1 revenue of $801.3 million is up 22% compared to last year and slightly outpaced the consensus estimate but is offset by whisper numbers that were higher, weak bookings and guidance.

The booking miss is more profound, considering that analysts have been trimming their targets and lowered the bar during the quarter. Also, top-line growth is slowing from the high-20% range to the low-20% range and may fall into the teens by year-end. Bookings in Q1 came in at +19%, decelerating from +25% in Q4, suggesting additional slowdown should be expected. 

The internal data is not all bad but aligns with an outlook for decelerating growth. Average daily active users and average monthly unique players grew solidly at 17% and 13%, but the growth slowed sequentially from 22% and 18%, with no pickup expected this year. Bookings growth is sequentially flat at up 6% but is offset by decelerating engagement growth. Hours are up only 2% compared to 21% in Q4 and unlikely to accelerate this year. 

The margin news is the best, but it comes with a caveat. The company significantly improved its operating losses, cash flow, and free cash flow to drive outperformance on the bottom line but at the cost of investment. The business cut its CAPEX by 50%, which may have something to do with the quarterly results, but GAAP losses persist. 

Guidance is among the worst news items. The company lowered its guidance for FY bookings, increased its outlook for annual losses, and provided a weak outlook for Q2, which may lead to another guidance reduction for this tech stock.

Expect Analysts to Cap Upside for Roblox

Ironically, Roblox is listed among the Top Rated Stocks by analysts on the Marketbeat platform. That is because the trend in analysts' sentiment has been bullish over the last twelve months, playing into the post-release disappointment felt today. Upgrades and price target revisions lifted the rating to Moderate Buy from Hold and the price target by 25%, but that trend is unlikely to continue. Investors should expect downgrades and price target reductions over the next few days and weeks. The risk now is that Roblox will remain range-bound and at the low end of its range. 

The technical outlook could be better. The 30% discount is an attractive entry but may not lead to gains soon, if at all. Roblox is growing and building leverage but continues to struggle with growth outside of its largest demographic, nine to twelve-year-olds, and profitability is still years away. With growth slowing and analysts on track to reset the consensus outlook, the risk of a new low is high.