Shares of Roblox Corp. continued to sell off on Friday as analysts questioned the growth initiatives presented at the social media company’s investor day on Thursday and in August and the performance fell short of expectations.
Wedbush analyst Nick McKay, who has a neutral rating and a $34 price target, was somewhat cautious about some of the new features the company offered, saying “we think several of its strategies could prove challenging for continued growth with high pace. “
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For example, Roblox executives announced Thursday that they will begin offering new avatar customization, the ability to destroy in-game objects and in-game voice chat, a browser-free PC format and immersive ads aimed at users over 13.
“In particular, we’re skeptical that Roblox’s game engine is robust enough to sustain older and wealthier users,” McKay said. “In our opinion, the graphics on the Roblox platform look comparable to those seen on consoles a decade ago or more in some cases, and several of the initiatives it presented at its analyst day appeared to be already proven concepts from other platforms .”
Roblox is also facing challenges to its game engine from companies such as Unity Software Inc. u,
“Game engines like Unity are more robust than Roblox’s engine and are just as democratic, suggesting that a company like Unity could undermine Roblox’s business model and share more of the revenue with developers than Roblox shares,” McKay said. “Given that around 70% of all games are currently developed using Unity, this seems like a potential problem for Roblox.”
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Jefferies analyst Andrew Uerkwitz said that while the August bookings outlook was in line with his forecasts, he was concerned about the company’s plans for an immersive ad platform.
“Immersive portal ads, in our view, could open up creative new ways for experiences to monetize and engage with users,” said Uerkwitz. “If done right, the advertising business is likely to be as large as the outlay.”
“However, we also see a Pandora’s box of issues that could arise with the ads,” Uerkwitz, who has a hold rating and a $43 price target, wrote. “Therefore, we expect Roblox to roll out the product slowly and do not see a material contribution in 2022 or 2023.”
Stifel analyst Drew Crum wrote that while August’s $233 million to $237 million in bookings was in line with seasonality, it was about $6 million below his estimates “and appeared to disappoint the market with shares trading after disclosure of this measurement’.
Bookings, or revenue plus the change in deferred revenue, are important especially since Roblox recently reported a surprise drop in bookings, its second consecutive quarterly year-over-year decline. In May, when Roblox reported an unexpected drop in bookings, the stock posted its worst one-day performance since going public.
Crum, who has a buy rating and a $50 price target on the stock, said Roblox’s push to target older users — which includes attracting new users while retaining players who started using Roblox when they were tween — is the core of his market thesis. Roblox said it grew users aged 17 to 24 by 40% in August.
This team is “projected to become the largest Roblox team in the near future,” Crum said. “We think this is important because older children/adults tend to earn better than younger children.”
How Roblox works: 5 things you need to know about the tween-focused gaming platform
JP Morgan analyst David Karnovsky, who has an overweight rating and a $53 price target, also said both August bookings and daily active users of 59.9 million were below his expectations. While the company did not provide new forecasts, Karnovsky said Roblox “broadly commented on margins, stating that with bookings increasing, profitability could potentially return to pre-COVID levels.”
Meanwhile, Roblox plans ambitious growth and that means margin pressure, Jefferies’ Uerkwitz wrote
“The company is focused on 10xing the business,” Uerkwitz said. “This will likely keep margins suppressed in the short and long term.”
Of the 23 analysts covering Roblox, 12 have a buy rating, eight have a hold rating and three have a sell rating, with an average target price of $45.06, up from $45.44 recently. As of June 2021, all eight analysts covering Roblox had buy ratings, which it has enjoyed for six quarters, according to FactSet data.
Shares of Roblox are down 61.7% for the year, compared with an 18.7% drop in the S&P 500 SPX,
and a 26.8% drop in the tech-heavy Nasdaq Composite Index COMP,