Roblox (RBLX) is a market leader for gaming apps and the short report from The Hindenburg. alleging irregularities in engagement metrics had a negligible impact on its share price.
In October 2024, Roblox shares dropped 9% after Hindenburg’s short thesis but quickly recovered, closing only 2% lower, highlighting investor resilience. The stock, which was coasting in the low forties then, has gained almost 50% since then to $58 today.
I believe it is a solid company. Although it is overpriced, it is worth considering as an investment if the price drops below $50.
Positives
Market Leader: Roblox is the number one grossing app for the iPad across the App Store, and regularly among the top 10 apps for the iPhone, across categories, according to data collected by Refinitiv.
Not gaming the market: Roblox also showed strong App Store momentum across some of the biggest gaming markets in the world, including North America, Europe, and SEA. I believe these gross numbers are extremely difficult if not impossible to fudge, instead it supports Roblox’s strong commercial value and future prospects.
Good quarterly numbers and guidance: Roblox’s booking in Q2 grew around 22% YoY, to $955Mn, and it guided to $1-$1.025Bn for Q3.
Partnering with Shopify: The commercial integration partnership with Shopify also helps Roblox further build out its virtual market, with better monetization opportunities.
Wall Street likes it: Ken Gawrelski, an analyst from Wells Fargo, maintained a Buy rating on Roblox, raising the price target to $58.00. He observes that the company’s strong engagement trends continue to outperform expectations, with a significant increase in concurrent users and app downloads, indicating robust user growth. These factors contribute to a raised third-quarter total bookings growth forecast, which is now expected to surpass the company’s guidance and the consensus estimates.
Great monetization tools: Roblox’s expansion of monetization tools, and strength in in-game spending is a significant competitive advantage for driving long-term developer and user engagement on the platform. Shopify and other initiatives are expected to enable developers to better monetize their offerings.
The trend is their friend: The strategic shift towards direct response advertising, including new partnerships and live commerce testing, indicates that Roblox can make the most of the new opportunities in digital advertising.
These initiatives give me confidence in the company’s sustainable long-term revenue growth.
Negatives
Hindenburg’s biggest grouse was the possibility of fudging and overstating user growth and engagement numbers, which though denied strongly by the company and discarded by analysts could create doubts about the valuation in the future.
Revenue growth forecasts for the next 3 years is around 16-18% and with the stock selling at 7.5x sales, it is expensive and a quarterly miss could lead to a large drop. Even the positive Wells Fargo analyst had a price target of $58, we’re already crossed that level.
It is loss-making on a GAAP basis with heavy stock-based compensation, which likely sets a cap on its valuation. That said cash flow is strong – around 19% of revenue.
Overall, Hindenburg didn’t make an impact, Roblox is performing well but I would be very careful about the price and get it lower to make a meaningful return.