Wolfe Research downgrades Roblox, cites growth worries after November update

Published Wed, Dec 21 202210:58 AM ESTUpdated Wed, Dec 21 202211:05 AM EST

Sell shares of Roblox as they have further to fall, according to Wolfe Research. Analyst Gal Munda downgraded shares to underperform from peer perform after Roblox issued a November business update last week that showed slowing growth, as well as a drop in what it earns from its daily users. "Our tone has always been tilted negatively despite our prior peer perform rating since there has been a cult-like investor base with our conversations with investors reflecting the fact that there were large institutional backers in the name," Munda wrote in a Tuesday note. "However, on the back of weak November metrics that seemed to have been contrary to management expectations given the rhetoric provided on its 3Q earnings call, we believe this dynamic amongst RBLX's investor base will shift and leaves room for downside from current levels," he added. Roblox shares have dropped more than 73% in 2022, far more than the S & P 500's 19% decline. However, the analyst expects further downside from here. His $24 implies shares could fall another 13% from Tuesday's closing price of $27.58. Meanwhile, consensus estimates for bookings growth over the near-to-medium term remain elevated, according to the analyst. Roblox refers to its revenue number as "bookings," which the company generates through sales of its virtual currency Robux. Players use the in-game currency to buy accessories for their avatars, as well as access additional game features. The analyst also has further questions on how advertisements will be integrated into the virtual gaming platform. "We now forecast RBLX bookings CAGR from 2022 to 2025 of 12% (vs 14% prior), decreasing our 2023 EBITDA estimate to $253 (vs $288 prior)," Munda wrote. "With little visibility into what the sustainable bookings growth for RBLX is driven by uncertainty regarding its ability to monetize advertising, and its ability to drive profitable DAU growth in less developed countries, we downgrade to Underperform from Peer Perform," he added. —CNBC's Michael Bloom and Sofia Pitt contributed to this report.