Roblox toys were displayed at a toy fair in London in 2019.
Leon Neal/Getty Images
The children’s gaming phenomenon Roblox got a burst of Buy recommendations Monday morning, including initiations of coverage by the bankers who advised on the company’s direct listing on the New York Stock Exchange last month. Wall Street’s analysts praise the company as a combination of mobile gaming and social media.
Some say its stock (ticker: RBLX) could double.
Roblox stock has already risen by half since its March 10 debut at $45. On Monday morning, the stock added 5% to reach $71 as Morgan Stanley, BofA Securities, and Truist weighed in with Buy recommendations.
The company provides a software platform to an army of independent game developers who create landscapes, adventures, and virtual collectibles for a young audience that reached 33 million daily users last year. Those youngsters average a remarkable 154 minutes a day on Roblox—playing, exchanging messages, and making purchases with the company’s digital currency, whose receipts of real cash grew from $694 million in 2019 to $1.9 billion in 2020.
Revenues in 2020 were $924 million, because of deferrals required under accounting rules, with a net loss of $253 million. Yet operating cash flow for the year was $590 million and free cash flow, after capital spending, was a solid $411 million.
Morgan Stanley’s Brian Nowak wrote in his initiation note that Roblox is still in the early innings of its user growth, and could increase the daily total by 21% in each of the next few years. Even if it does that, he said, the company will only have tapped 14% of the 5-to-24-year-old population in existing markets by 2024.
Those markets don’t include China, where Roblox plans a joint venture with Tencent Music Entertainment Group (TME), he noted. Nor does the company earn much today from advertising.
Nowak rated the stock at Outperform, with a target of $80 for the price, but those opportunities could add upside, he wrote.
The stock currently trades at 16 times Morgan Stanley’s forecast for next year’s per-share sales, which Nowak says is in line with other social media stocks, such as Snap (SNAP) and Twitter (TWTR). But Roblox also enjoys the high user engagement of an online gaming company, so the analyst argues it should get a multiple of 19 times sales, resulting in his $80 target.
Success in China could add another $300 million to the base-case $1.2 billion in operating cash flow he predicts for 2024. More advertising sales in the Roblox world could add $900 million. Together, those opportunities give Morgan Stanley a bull-case price target of $130 for the stock. That is nearly double the current level..
BofA analyst Ryan Gee launched his coverage Monday with a Buy rating and a slightly more modest price target of $78. Roblox was the No. 1 mobile app downloaded last year on Apple ‘s store, he notes, and the third-most downloaded worldwide.
Outside developers create the platform’s content, with more than 20 million “experiences” in the current catalog. In addition to geographic expansion, Gee argues, Roblox can add older users as Gen Z matures and developers create features for an older audience.
“[Roblox] is one of the most compelling alternatives to traditional mobile game developers,” Gee wrote in Monday’s initiation note. If the company can grow faster than he currently models, and better monetizes its users, the BofA analyst says the stock might reach $100.
Truist analyst Matthew Thornton also began coverage Monday, with a Buy rating and $78 price target. Including China, the company’s daily users could approach 70 million by 2024, he estimates. That could lift 2024 cash receipts from user purchases and advertising to $3.2 billion, says the analyst. Free cash flow could reach $1.5 billion, with opportunities in subsequent years to add revenue from education, concerts, movies, and e-commerce.
The Roblox platform benefits from two mutually-reinforcing network effects, with social media and gaming content, Thornton says.
Write to Bill Alpert at [email protected]
