The past week has not been a fun time to own growth stocks. Over the seven days ending Wednesday night, the growth-tilted Nasdaq lost 12.3% of its value, and it's down another 1.9% as of 2:35 p.m. ET today.
This is the second straight day of gains for Roblox, a stock that just reported a $100 million sales miss in its fiscal first quarter, and a bigger loss than Wall Street had predicted to boot. So why are investors bidding the stock up instead of down?
In a tic-tac-toe of ratings moves, investment banks Benchmark, Deutsche Bank, and Needham all cut their price targets on the stock this morning, and while Benchmark now sees it as worth less than the $27 and change it currently costs, two others see the potential for big price gains at Roblox.
Needham thinks Roblox stock could end this year at $40 a share, and Deutsche Bank is even more optimistic, predicting a $45 target price -- implying potential share price gains of anywhere from 48% to 67%. Both Deutsche Bank and Needham reiterated buy ratings on Roblox today, reports TheFly.com.
Needham in particular emphasized the potential for Roblox to add $1 billion in advertising revenue by 2027 -- more than 50% of the revenue Roblox collected over the last 12 months, and all coming from just one business line.
Will Roblox prove these analysts right and hit their share price targets? For now, all I can tell you is that the company is generating positive free cash flow at the rate of nearly $530 million per annum, giving it a 32 price-to-free-cash-flow ratio at its current market capitalization of $16 billion. That's not a cheap price to pay, and Roblox could end up looking even more expensive if analysts are correct in their predictions that free cash flow will decelerate to $343 million by the end of this year.
Much as I'd like to be able to tell you today's stock price rally is justified, unless this company can figure out a way to grow its free cash flow instead of shrink it, Roblox stock could still have further to fall.