Take a pass on Roblox, says Roth

Online gaming platform Roblox (Roblox Stock Quote, Charts, News, Analysts, Financials NYSE:RBLX) has been wavering around the $40 mark for about a year now, but don’t expect a breakout anytime soon, according to Roth Capital Partners analyst Eric Handler, who gave a pre-quarter update on Monday. Handler reiterated a “Neutral” rating on the stock, saying EBITDA margin contraction is an issue.

Ahead of Roblox’s first quarter 2023 financials due on Wednesday before market open, Handler said he’s anticipating a strong growth outlook but perhaps a little less dramatic than previously thought. 

Softer than anticipated bookings results are expected for the quarter. The analyst moved his Q1 adjusted EBITDA estimate from $70 million to $62 million and his bookings from $786 million to $768 million, with his bookings call standing near the upper end of management’s guidance range reported in its latest monthly update at $757-$773 million. (All figures in US dollars.)

Handler said daily active users (DAU) growth was stronger than expected in the company’s latest update at 66.2 million, but this positive is more than likely offset by a projected one per cent decline in average bookings per daily active user (ABPDAU) to $11.60. Handler said that would represent the seventh consecutive quarter of year-over-year declines in ABPDAU.

“We are lowering our 1Q estimates in the wake of softer than anticipated bookings results in the quarter. However, we continue to look for robust 20 per cent + growth in 1H23 before more challenging comparisons begin to occur. There is little doubt that investment spending has positively impacted international expansion and the aging up of the platform’s audience. However, these initiatives carry a high cost as adjusted EBITDA margin further contracts,” Handler wrote.

With his “Neutral” rating, the analyst lowered his target price from $45 to $37 per share, with his target based on his 2023 bookings and adjusted EBITDA estimates and using 7x and 65x, respectively, down from 8x and 80x prior. At the time of publication, Handler’s new target represented a one-year projected return of 5.6 per cent.

“There are no other companies in our video games coverage with a similar bookings growth trajectory as Roblox, but what keeps us on the sidelines is the lack of clarity towards when stabilization could occur with adjusted EBITDA or adjusted EBITDA margin,” Handler said.