Ranked as one of the top online entertainment platforms for audiences under the age of 18, Roblox Corporation (RBLX) in San Mateo, Calif., made its stock market debut on March 10, 2021, via a direct listing. The recent success of the South Korean drama television series Squid Game played to the company’s advantage as thousands of global users have been playing ‘Red Light, Green Light’ in several game rooms dubbed ‘Squid Game’ on RBLX’s platform. In addition, it launched the first Roblox Listening Party on September 24.

However, the stock has declined 15.7% in price over the past month and 18.9% over the past three months to close its last session at $70.44.

Last month, the National Music Publishers’ Association (NMPA) settled a case with RBLX regarding its alleged illegal use of songs from numerous artists. Although the terms of the agreement were not announced, NMPA had claimed roughly $200 million in damages from the company in June 2021. Jefferies analyst Andrew Uerkwitz maintained a Hold rating in the stock but lowered the price target. Moreover, RBLX’s near-term prospects look bleak as schools reopen and children spend less time at home.

Here are the factors that could influence RBLX’s performance in the upcoming months:

Industry Headwinds

Following its tech and education sector crackdown, China announced in August 2021 that kids and teens under 18 years old in China would be allowed only up to three hours per week to play online video games. This decision is expected to harm RBLX’s revenue because it has significant operations in China, and its offerings are mainly aimed at children under 18 years old.

The ongoing global semiconductor chip shortage also doesn’t bode well for RBLX. Furthermore, since children are expected to spend more time outside, especially at school, as economies continue to recover gradually from the COVID-19 pandemic, the company could suffer further setbacks.

Top Line Growth Doesn’t Translate into Bottom Line Improvement

RBLX’s revenue surged 126.6% year-over-year to $454.10 million for the second quarter, ended June 30, 2021. The company’s average daily active users (DAUs) increased 29% year-over-year to 43.20 million. However, its loss from operations came in at $142.95 million, up 95.7% year-over-year. Its net loss was $140.13 million, representing a 95.9% year-over-year rise. Also, its loss per share came in at $0.25 compared to $0.40 in the year-ago period.

Poor Profitability

In terms of trailing-12-month gross profit margin, RBLX’s 17.32% is 66.1% lower than the 51.07% industry average. Its trailing-12-month EBITDA margin is negative, versus the 20.98% industry average. Moreover, its trailing-12-month ROCE, ROTC, and ROTA are negative compared to the 8.55%, 4.31%, and 2.68% respective industry averages.

POWR Ratings Reflect Bleak Prospects

RBLX has an overall D rating, which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, RBLX has a D grade for Stability.

The stock has a D grade for Value, which is in sync with its forward EV/S and P/S of 14.58x and 15.15x, respectively, which are higher than the industry averages of 2.62x and 1.74x.

RBLX is ranked #21 of 24 stocks in the Entertainment - Toys & Video Games industry. Click here to see the additional POWR Ratings for RBLX (Growth, Momentum, Sentiment, and Quality).

Bottom Line

With the economy's continued recovery from the COVID-19 pandemic, RBLX’s shares have declined considerably over the past few months. The stock is currently trading below its 50-day and 200-day moving averages of $81.26 and $80.39, respectively, indicating a downtrend. Moreover, analysts expect its EPS to decline 18.2% for the quarter ending December 31, 2021, and 75% this year. So, we think the stock is best avoided now.

How Does Roblox (RBLX) Stack Up Against its Peers?

While RBLX has an overall POWR Rating of D, one might want to consider investing in the following Entertainment - Toys & Video Games stocks with a B (Buy) rating: Spin Master Corp. (SNMSF), DoubleDown Interactive Co., Ltd. (DDI), and Electronic Arts Inc. (EA).

RBLX shares were trading at $70.22 per share on Monday afternoon, down $0.22 (-0.31%). Year-to-date, RBLX has gained 1.04%, versus a 17.40% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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