Can Roblox’s share price continue to outperform post-earnings?

Roblox’s share price outperformed in July. A strong trading update for May showed continued growth in user engagement on its platform, which was enough to send the stock on a prolonged rally that has shown little sign of slowing down. Over the past month, Roblox’s share price is up over 23%, closing Friday 5 August at $49.24.

Yet, since the start of the year, Roblox’s stock is still down more than 53%. For some, that might suggest Roblox is trading at a discount — especially if second quarter results due this week deliver more user growth. But on a fundamental level, the stock could still be trading at a premium.

Trading update sends Roblox share price higher

Roblox said that in May daily active users increased 17% to 50.4 million. The total number of hours users spent on the platform came in at 3.6 billion, up 10% year-over-year. Revenue was estimated to be between $194m and $197m for the month, up between 28% and 30% year-over-year.

That makes growth in daily active users a key factor to watch in the second quarter results. In the first quarter, this came in at 54.1 million, up 28% year-over-year. Hours engaged was 11.8 billion in the quarter, up 22%.

One headwind to watch out for is the impact of a strong dollar on earnings.  Roblox said a strengthening dollar against other currencies had an “adverse impact on bookings” in May.

As the value of the dollar increases, the value of revenue made in other currencies decreases. In Roblox’s case, this led to a 4% year-over-year reduction in bookings in May. Estimated bookings for the month were between $196m and $199m, down 9% to 11% year-over-year.

Is Roblox’s share price too expensive?

Roblox’s stock surge might be hard to maintain in the medium term. A $30bn market cap is substantially higher than the $1.9bn the company made in 2021. The company is also yet to make a profit.

Adding to the overvalued thesis is the fact that Roblox’s stock is trading above most analyst estimates. Of the 18 analysts polled by Refinitiv, Roblox has a median share price target of $40, suggesting a near 19% downside on Friday’s close. 

A saving grace is that Roblox’s main near-term headwind is known. Pandemic lockdowns drove stellar growth in Roblox’s business. In 2021, revenue increased by 107% on the previous year. In 2020, it was up 112%.

With lockdowns lifted — and children once again at school — revenue growth is normalising. Consensus is that revenue growth will slow to 4.3% this year, before rising to 13.3% in 2023, according to data from Yahoo Finance. No-one should be expecting triple digit revenue growth when Roblox updates the market this week.

What analysts are expecting

Wall Street expects Roblox to post a loss of $0.23 per share for the second quarter, according to data from Zacks Investment Research. Revenue is pegged at $645m.

An earnings beat could send Roblox’s share price higher, but this is by no means guaranteed. In the past two quarters, the company has missed Wall Street expectations. In first quarter results, the company reported a loss of $0.27 per share, well wide of the expected $0.21 loss per share.

MKM Partners analyst Eric Handler raised his price target on Roblox to $40 from $28 in June. The analyst told investors that if second quarter results show strong July bookings then the Roblox share price could continue to enjoy its recent momentum.

However, it’s worth pointing out that Handler’s revised target is below where Roblox closed Friday. investors will have to decide whether Roblox share price will continue to outperform or is just too overvalued.