What happened

Shares of Roblox (RBLX -1.18%) were down about 5% after the market opened on Tuesday but had erased those losses by the early afternoon. The culprit was Barclays analyst Mario Lu, who initiated coverage of Roblox with an underweight rating and a price target of $20.  

The analyst said Roblox is overvalued compared to social media stocks, and also faces obstacles growing its developer base because it takes such a high cut of revenue made from content. The stock is down 65% year to date, underperforming the S&P 500, which has fallen 23%. 

So what

Lu sees future growth being a challenge for Roblox, since its highest-monetized regions like the U.S. and Europe are already 30% penetrated. He also thinks Roblox's take rate of 71% hurts the company's ability to attract developers to the platform, which it relies on heavily to provide the content that brings in users.

Still, Roblox is in the early days of finding new ways to monetize its users. It currently depends on users spending money on virtual currency, or Robux, to buy digital items while playing. But management recently announced plans to launch immersive 3D advertising next year. 

The analyst might have a stronger point on Roblox's valuation. Indeed, Roblox's price-to-sales ratio is currently 9.4. That is not only more than double the valuation of leading social media specialists like Meta Platforms and Snap, but it's also more expensive than major game companies like Activision Blizzard and Electronic Arts.

RBLX PS Ratio Chart

Data by YCharts

Now what

The reason Roblox might deserve its premium is that it is not accurate to describe it as either a gaming or social media platform. Roblox is a new hybrid that blends aspects of both experiences. After all, that is what the metaverse is all about, and Roblox has become the poster child of that select universe of companies that could capitalize on the opportunity.

But there's no doubt the stock won't likely move back toward its previous highs until Roblox reports better revenue growth. This has become difficult over the last year following the stay-at-home environment during the pandemic.