Roblox Corporation (RBLX) develops and operates an online entertainment platform that leverages its various offerings, such as Roblox Client and Roblox Studio, which have 3D features, and Roblox Cloud, among others. Because children spent more time over the last year playing online games in the absence of physical school classes amid the COVID-19 pandemic, RBLX’s revenue grew significantly for the quarter ended March 31, 2021.

The stock has advanced by 19.8% over the past month to close yesterday’s trading session at $89.71, after hitting its all-time high of $95.

But RBLX has so far not been very successful in its efforts to expand its market reach beyond children. Furthermore, as the economy gradually reopens, children are expected to resume in-school classes and are unlikely to spend as much time on online games as they did at home during the pandemic. So, even though the company had an impressive market debut on March 10, 2021, we think its near-term prospects look uncertain.

Click here to check out our Video Game Industry Report for 2021

Here are the factors that we think could influence RBLX’s performance in the coming months:

Impressive Market Debut

RBLX made its market debut on March 10, 2021 via a direct listing, thus allowing its existing shareholders to sell immediately without being subject to a lockup period. On the day of listing, its shares surged nearly 55% to $69.50, valuing the company at more than $45 billion. It now has a market capitalization of $51.12 billion. RBLX is unique because it doesn’t make the content for its platform itself  but is reliant on a growing community of more than eight million content creators and developers.

Mixed Financials

RBLX’s revenue for its fiscal first quarter ended March 31 came in at $386.98 million, which represents a 139.5% year-over-year rise. Its bookings for the quarter increased 161% year-over-year to $652.30 million and its average daily active users (DAUs) increased 79% year-over-year to 42.10 million.

However, the company’s loss from operations increased more than 85% year-over-year to $135.06 million in the quarter. Its net loss increased 80.5% year-over-year to $134.22 million. And its  loss per share for the quarter was $0.46 compared to $0.44 in the prior-year period.

Stretched Valuation

In terms of forward non-GAAP P/E ratio, RBLX’s 107.87x is 433.7% higher than the 20.21x industry average. Its 19.89x forward EV/S is 612.9% higher than the 2.79x industry average. Also, the stock’s 20.46x and 81.51x respective forward P/S and forward EV/EBITDA are higher than the 2.25x and 10.56x industry averages.

POWR Ratings Reflect Uncertainty

RBLX has an overall C rating, which equates to Neutral 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. RBLX has a C grade for Growth, which is justified given that its revenue and EPS are expected to grow in the near- to mid-term, but at a moderate rate. Its annual revenue is expected to increase 19.3% year-over-year to $3.12 billion in its fiscal year 2022, while its EPS is expected to grow 2.5% year-over-year to $0.81.

It has a D grade for Value, which is in sync with its higher-than-industry valuation ratios. The stock has a D grade for Stability as well.

Of 23 stocks in the C-rated Entertainment – Toys & Video Games industry, RBLX is ranked #16. In addition to the POWR Ratings grades we’ve just highlighted, we’ve also rated it for Momentum, Quality and Sentiment. Get all RBLX’s ratings here.

Better than RBLX: Click here to access five top-rated stocks in the Entertainment – Toys & Video Games industry.

Bottom Line

RBLX looks significantly overvalued now because the pandemic-driven surge in demand for its online games is expected to decline in the near term with children going back to school. So, we think it’s wise to wait for better entry points in the stock.

Click here to check out our Video Game Industry Report for 2021

RBLX shares were trading at $92.15 per share on Thursday morning, up $2.44 (+2.72%). Year-to-date, RBLX has gained 32.59%, versus a 12.79% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

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. More...

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