HSBC starts Roblox at Buy amid improving economics, growing market potential

Investing.com -- HSBC (LON:HSBA) initiated research coverage on Roblox Corp (NYSE:RBLX) stock on Thursday with a Buy rating and a price target of $63.

Roblox, known for its popularity among younger audiences with 89 million daily active users (DAUs) and projected bookings of $4 billion in the fiscal year 2024, has faced challenges with profitability and share dilution in the past.

However, HSBC sees a positive shift in the company's outlook, driven by “improving economics, expanding market potential, and the revamp of its advertising offering.”

The firm notes that Roblox's virtual world economics are on an upward trend, with EBITDA margins increasing by 7% year-over-year in the first nine months of 2024.

Over the medium term, from 2024 to 2029, HSBC forecasts a significant improvement in adjusted EBITDA margins and a normalization of share-based compensation costs as a percentage of bookings.

HSBC also anticipates growth in Roblox's user base, particularly among older users, due to an increase in hit titles, expansion to console platforms, and the introduction of adult-only experiences.

The firm projects that users aged 13 and above will represent 67% of DAUs by the fiscal year 2029 (FY29), which is expected to help grow total DAUs to approximately 311 million by the same year and increase bookings per DAU at a compound annual growth rate of 7%.

Roblox’s foray into advertising is seen as a potential high-margin opportunity, despite the challenges of integrating ads into gaming and competition for user data.

“We take a conservative view on monetisation but still find ads could generate an incremental USD240m of EBITDA by FY29e and we include the opportunity in our valuation,” analyst Mohammed Khallouf said in a note.

HSBC's valuation of Roblox is based on a relative valuation methodology, comparing it to a peer group of online platforms and discounting projected fiscal year 2029 EBITDA. The firm's analysis suggests about a 12% upside to the current share price.

Potential risks to its thesis include the difficulty of moderating content for younger users, the unproven nature of the advertising product, uncertainty surrounding app store fees, and the constraints of Roblox's dual-class share structure.