Investors looking for bargains might want to turn their attention to Roblox (RBLX 1.42%).
Shares of the company behind the user-centric gaming platform fell by about 20% after management relayed some news that disappointed most Wall Street analysts.
Bucking the trend, BMO Capital's Brian Pitz expects strong profit growth in the quarters ahead, despite a lowered outlook for quarterly bookings for the rest of 2024.
Pitz recently lowered his price target for Roblox by $1 and maintained an outperform rating. The new target, $56 per share, suggests that the stock can soar by about 81% over the next 12 months.
A big reason to remain bullish for Roblox
According to generally accepted accounting principles (GAAP), Roblox expects to lose roughly $1.1 billion this year. Lately, though, the company has been reporting positive operating cash flow that is growing by leaps and bounds.
Roblox reported free cash flow that surged 133% higher to $191.1 million in the first quarter. Pitz is bullish for Roblox because he feels its investments in infrastructure could subside in the quarters ahead and allow for continued profit margin growth at a rapid pace.
Very risky
At recent prices, Roblox is still trading for a sky-high valuation of about 51 times the midpoint of management's free cash flow estimate for 2024.
Margin expansion could help Roblox's bottom line expand faster than revenue in the years ahead. Unfortunately, top-line growth isn't very strong, and it's been getting weaker. Management expects bookings, which precede revenue, to grow by roughly 15% this year.
Roblox stock is still trading at a valuation that implies rapid growth despite a decelerating top line. An 81% return over the next 12 months isn't impossible, but the stock's valuation is too lofty for anyone without an enormous tolerance for risk. It's probably best to look for bargains somewhere else.
