This video game maker just flashed a 30% upside.

October 31, 2023 at 06:05 AM EDT

roblox logo on smartphone with blurred images on computer screen in background

Even though the stock only IPO'd in 2021, shares of Roblox Corp (NYSE: RBLX) have given investors a wild ride in the years since. An initial 130% rally soon gave way to an 85% haircut, but the past eighteen months have seen shares trade comparatively range bound, albeit with their fair share of double and triple-digit percentage moves.

The San Mateo headquartered video game maker has struggled to match the buoyancy of larger and perhaps better-known peers, such as Take-Two Interactive Software (NASDAQ: TTWO) and Electronic Arts Inc (NASDAQ: EA). Since the end of March, these two have tacked on 15% and 8% in value, while Roblox has shed more than 30%. A dodgy run of earnings and weakening guidance did little to help its cause, and it was testing all-time lows as recently as September.

Turnaround potential

However, over the past month, the tide has turned. A recovery rally is well underway, with Roblox up a solid 20% in the past four weeks versus Electronic Arts, which is up 3%, and Take-Two, which is down 3%. This will be a welcome change of pace for investors, who must surely have been losing patience. But for those of us on the sidelines thinking about getting involved, it gets even better.

October 27 saw a bullish upgrade to Roblox shares from the team over at Truist, who upgraded it to a Buy from Hold rating. Analysts there have identified a potential path to achieve 20% growth in the company's 2025 adjusted EBITDA. This growth is expected to be driven by several key tailwinds. First and foremost, the core business operations are anticipated to contribute significantly to this expansion. In addition, implementing immersive advertising strategies is seen as a promising revenue booster.

The Truist team is also bullish on Roblox's plans to introduce new platforms, although specific details are not disclosed yet. They are also looking to transition away from developer subsidies based on user engagement, which could positively impact their financial performance.

Moreover, there is an element of flexibility with potential upside or risk mitigation related to real commerce ventures and cost efficiencies driven by artificial intelligence. The upcoming Investor Day is viewed as a pivotal event that could shed light on these opportunities and their financial implications.

Getting involved

Truist's bullish stance was matched by Raymond James, which is inclined to call last month's low a bottom, with only upside and a potential return to a triple-digit share price in the cards. They initiated coverage of Roblox with a Strong Buy rating and slapped a $41 price target on its shares. From where shares closed on Friday, October 27, that price target gives the stock an upside of more than 30%. If shares were to hit it in the coming weeks, RBLX stock would be well on its way to testing the upper limit of the range it's been stuck in since last year.

These were two big calls for the stock to get, especially after shares had been putting in such a decent move to the upside. The Raymond James team noted many of the same tailwinds as the guys from Truist. They also pointed to the ongoing shift toward video gaming in young people's entertainment budget and the strong likelihood for Roblox to capture market share on the international scene. There's also the potential for them to expand into non-gaming areas such as education and content creation.

All in all, it's looking like we've got an incredible entry opportunity on our hands, and one where the risk/reward profile might be too promising to turn down. The company will have to start delivering on this promise in the coming quarters, as it can't risk another dodgy one spooking investors for good. While August's report topped analyst expectations on the headline figures, it also showed a sharp increase in costs, expenses, and operating loss.

Still, this has all been baked into the share price, and going off the recent action, it appears that Wall Street is more than happy to put it behind it. Look for shares to top $33 next week as this would be a new higher high, following on from September's bottom, and so would strengthen the case for them going on and hitting $41 in the near future.

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This video game maker just flashed a 30% upside.

Turnaround potential

Getting involved

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