What happened
Shares of Roblox (RBLX 1.60%) were down on Monday after an analyst said he believes the stock will underperform the market from here. As of noon ET, Roblox stock was only down 2%, but it had been down 6% earlier in the session.
So what
According to The Fly, MoffettNathanson analyst Clay Griffin believes Roblox stock will do worse than the market going forward. This was the first time the analyst had commented on Roblox. And in saying it would underperform the market, Griffin gave Roblox stock a price target of $19 per share, suggesting roughly 50% downside from where it traded at the close of the market on Friday.
Griffin's bearish stance on Roblox stock seemingly stems from its lofty valuation. Looking at its price-to-sales (P/S) ratio, Roblox has come down from a sky-high P/S of 44 in 2021 to where it trades today at around nine. However, a P/S of nine is still expensive in absolute terms, especially for a company with a slowing revenue-growth rate.
Roblox's management estimates that its revenue for August was up 22% to 24% year over year, which seems good. But for perspective, revenue roughly doubled in August 2021. So slowing top-line growth is why some investors are concerned about the stock's valuation.
Now what
To balance some of this out, Griffin also said Roblox is an "undeniably powerful interactive entertainment platform." It's a good reminder that valuation is an important aspect of investing, but it's not the only thing to consider. The quality of the business matters as well. And several of Roblox's key metrics still look solid.
For example, in its August update, Roblox's management shared that it averaged 59.9 million daily active users (DAUs) during the month. That's an all-time high and up sharply from the 58.5 million DAUs it recorded in July. Therefore, Roblox shareholders still have reason to be optimistic about this investment, even if the valuation is high.
