A selection of “Roblox” toys.
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The children’s videogame developer Roblox received a thumbs-up from J.P. Morgan analyst Alexia Quadrani, who began coverage of the newly public company with an upbeat call on Tuesday.
Shares of Roblox (ticker: RBLX) fell 3.3% to $68.56 in Tuesday afternoon trading amid broad market weakness.
Roblox isn’t a typical videogame product. The company’s software, highly popular among tweens, is more of a sandbox that gives users and developers the tools to create “3-D digital worlds.” Lockdown orders issued by various governments around the world brought more people to Roblox’s platform, leading to an 85% surge in its average daily user count in 2020 compared with the year-ago period, according to its Securities and Exchange Commission filings.
Quadrani expects its first-quarter average daily user count to grow to 39.6 million from 32.6 million at the end of 2020. But as Covid-19 lockdowns ease, Quadrani predicts, its user count will drop, and finish this year up 12% to 36.4 million. She expects the figure to reach 65 million by 2024.
In the note, Quadrani wrote that J.P. Morgan expects a movement “up and to the right” in terms of financial performance for Roblox as the company improves its technology and gives creators more tools. One potential example she cited is online advertising.
Quadrani said that most of the company’s users are under the age of 17, and spend about 2.5 hours on the platform a day. That combination would give advertisers ample access to a hard-to-reach group. Advertisers could display real- world items for sale within Roblox’s platform, but Roblox would have to build tools to send people outside the app to make purchases, or create landing pages within the app.
Another area of potential growth is using the Roblox platform for things beyond videogames. Quadrani pointed out that the company has already staged concerts that have attracted millions of people, while executives have suggested it could be used for education and business communication too.
“While some of the platform features that may drive long-term value for shareholders aren’t immediately obvious today, we believe an unlimited range of virtual experiences in a world that is progressively tech enabled and where one’s virtual identity increasingly matters offers significant upside for shareholders, even if the pace of innovation and execution is likely to vary,” Quadrani wrote.
Quadrani gave the stock the equivalent of a Buy rating, setting a target of $85 for the price, based on a multiple of 21 times the $2.6 billion of revenue she expects the company to bring in for 2022.
The company isn’t profitable, reporting its 2020 consolidated net losses widened to $257.7 million, from $71.1 million a year ago. Quadrani’s financial model predicts mounting losses through 2024.
All seven of the analysts that cover Roblox rate the stock a Buy. The average target price is $78.14, which implies an upside of about 14%.
After several delays, Roblox went public on the New York Stock Exchange via a direct listing in March. The company held a private financing round in January where it sold shares for $45. It closed its first trading day at $69.50. Roblox shares have fallen 1.2% in its lifetime as a public company.
Write to Max A. Cherney at [email protected]
