More than a few formerly high-flying growth stocks had the rug pulled out from under their feet this summer. For some, though, the market clubbing hasn't deterred Wall Street analysts from predicting success and big rebounds for their stock prices.
Despite the company being beaten down to a 52-week low, the average analyst following Roblox (RBLX 1.35%) has issued a price target that implies a gain of about 45% from recent levels.
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Pubmatic (PUBM 1.75%) also fell to a 52-week low recently, but Wall Street's consensus price target on the advertising tech company suggests it can climb about 55% from recent prices.
It's important for individual investors to remember that investment bank analysts have nothing to lose but their reputations if these stocks don't reach the price targets they set. Let's explore the reasons they're likely to outperform to see if they're right for your portfolio.
Roblox
If you have children who "play Roblox," you probably still think it's just a game, but it's not. The company is operating a platform capable of delivering a plethora of virtual experiences, the majority of which are created by users themselves.
During the month of June, 4.8 million Roblox users were motivated to produce new content in return for Robux, a virtual currency that can be exchanged for real money.
The lofty price targets on Roblox stock are coming in response to its rapidly growing debt ecosystem. During 2021 and 2022, the company paid out $1.1 billion to around 11,000 creators through its developer-exchange program. Payouts are growing fast. Independent Roblox developers are already on track to earn $800 million this year.
The top 10 developers on Roblox earned an average of $27 million over the past year, but you don't have to be at the top to make a living. The 1,000th highest-paid developer earned $64,000 over the past 12 months.
Roblox had 65 million daily active users in the second quarter, which was 25% more than it had a year earlier. That's impressive when you consider sales and marketing expenses in the first half of 2023 rose just 2.7% year over year.
Roblox has a lot of key performance indicators moving in the right direction, but its bottom line isn't one of them. The company's losses grew to a frightening $555 million over the past six months. Call me crazy, but I think any business with 65.5 million daily active users should earn money or at least show signs it's headed in the direction of profitability. It's probably best to keep this stock on a watchlist at least until its bottom line starts trending upward.
Pubmatic
Pubmatic operates a digital-advertising platform for publishers who want top dollar for their available inventory. The company caters to publishers with content viewed on a browser or mobile application. Its biggest growth driver at the moment, though, comes from ads shown on the connected televisions (CTVs) in our living rooms.
Q2 revenue from CTV grew 30% year over year, but the rest of Pubmatic's business took a small step back. Total revenue remained flat compared to the previous year at about $63 million, and disappointed investors pushed the stock down. At recent prices, it's about 41% below the peak it reached this summer.
It isn't just Pubmatic that's seeing a slowdown in sales. Soaring interest rates and the recession they could cause have advertisers tightening their belts. Alphabet reported Q2 Google ad revenue that rose just 3.3% year over year.
Pubmatic lost $5 million in Q2 according to generally accepted accounting principles (GAAP), but it is cash-flow-positive. Cash from operations worked out to $15.8 million, or a very healthy 25% of total revenue during the period.
At recent prices, you can buy Pubmatic for about 45 times forward-looking earnings expectations. Nearly profitable operations make this stock far less risky than Roblox, but a high-earnings multiple means its price could collapse if it doesn't start reporting profits again in the quarters ahead. If you're going to take a chance on Pubmatic, protect yourself and make it a relatively small part of a well-diversified portfolio.
