What happened
Online gaming platform Roblox (RBLX 3.83%) is a hit with kid gamers, but with Wall Street -- not so much. Roblox stock was shocked yesterday when Barclays bank initiated coverage with an underweight rating (i.e., sell), sending the shares down more than 6% at one point. It quickly rallied, however, ending the day up. Today, Roblox's ride higher continued, and as of 12:12 p.m. ET on Wednesday, the shares were up 5.7%.
So what
As for why, let's start with Barclays' criticism. According to the bank, Roblox games' core demographic are users aged 5 to 24. And in Europe and the U.S., where such gamers tend to spend more money per user on Robux virtual currency, Roblox has already acquired about 30% of this age group as customers.
Barclays thinks that this will cap how much more Roblox can grow within the lucrative European and American markets, before it must turn to less affluent regions of the world for user growth. And the analyst warns that this could imply "further potential downward revisions" in Roblox's forward growth.
Now what
To an extent, I think Barclays is right about that. But I also think it might be missing an important point, and judging from the stock's quick rebound after an initial sell-off in response to Barclays' note, it seems other investors could agree.
Roblox's primary customers might be age 5 to 24 now, but if the platform can hold on to those customers as they get older (and wealthier), then it has the potential to keep growing revenue from its existing customers and to add new customers age 5 to 24 who age into its core demographic.
There's still the question about whether Roblox can grow fast enough to justify its valuation, which is more than 9 times trailing sales, or roughly 68 times trailing free cash flow.
But free cash flow is expected to decline this year, and not to exceed the current trailing-12-month number again until 2024 (according to forecasts compiled by S&P Global Market Intelligence). So I agree that there's a risk Roblox might not grow fast enough to justify its valuation.
So enjoy Roblox's rising stock price today, because while it may last, it also may not.
