Purchasing stock of online entertainment platform Roblox (RBLX) is arguably the best way to play the metaverse trend that's been so incredibly hot over the past several months. Indeed, Meta Platforms (FB), formerly Facebook, can be thanked for amplifying the hype surrounding the emerging technological trend. I am neutral on RBLX stock. (See Analysts’ Top Stocks on TipRanks)
Despite Meta's focus on broader applications within the metaverse, most notably work and play, the biggest draw will likely be immersive gaming experiences. Now, Meta's Quest 2 headset is among the most affordable on the market, offering a great bang for VR newcomers' buck.
While there are a handful of great experiences to be had, it's clear that uptake of the device isn't yet at a level to power Meta's next leg of growth once today's popular social media platforms begin to look dated in the era of the virtual worlds.
With $10 billion to be spent on building Zuckerberg's metaverse of the future, Meta's future certainly seems bright. That said, Roblox, I believe, is a metaverse play that's already reached prime time.
Meta Building Metaverse of Tomorrow, but Roblox Has Metaverse of Today
In terms of userbases and user engagement, Roblox is one of the metaverse pioneers. Undoubtedly, Roblox would make for an incredible takeover target for a company like Meta had it not been for all the regulatory scrutiny shined on its over the years.
Today, Roblox is a mere $57.5 billion company. With many firms and creators leveraging Roblox's platform to build their own digital worlds, the video-game developer could easily be on its way past the $200 billion market cap mark.
Although Roblox has seemed to do everything right, the valuation on the stock is steep, and with higher rates on the horizon, investors may have a better entry point down the road as the growth trade continues to implode on itself. I'm a huge fan of Roblox, the company, but the valuation is my primary concern. It is for that reason that I am neutral on RBLX stock.
The billion-dollar question on investors' minds is whether Roblox can maintain its strengths as competition picks up across the board. The metaverse is still an abstract concept to those who've yet to jump into a Roblox-powered realm.
That said, big tech has recognized the trend, and they're opening up their wallets in a big way, not only to get a slice of the emerging market but to improve the chances of becoming a market leader one day. This begs the question: will Roblox join the ranks of big tech, or will it be pressured, as deep-pocketed rivals look to replicate its success with platforms of their own?
I think the former scenario is likeliest under its brilliant founder and leader David Baszucki. That said, I'm in no rush to punch my ticket into the metaverse play with the stock priced at around 40 times sales. That's expensive! Almost as expensive as some of the in-game "luxury" items that recently upset some parents ahead of Christmas.
As the high-multiple growth stocks have been selling off recently, the chances of Roblox stock falling towards $80 or lower seems relatively high.
Metaverse Trend Is Worth Betting on, but Roblox Stock Has Its Risks
Roblox is an incredible company with a front-row seat to one of the hottest tech trends of the decade. However, that doesn't necessarily mean its stock will outperform.
Growth at any price is never a good idea. As investing legend Warren Buffett astutely pointed out in a past Berkshire Hathaway (BRK.A)(BRK.B) annual shareholders' meeting, betting on trends with little consideration for valuation is not a magic formula for achieving the best investment results over time.
For now, investors should keep watch of the rapidly-growing game company to see if it can grow up alongside its young userbase. If it can, the rewards could be massive. For now, my biggest concern is that Roblox users will "outgrow" the platform.
Certainly, the "cartoony" graphics could use a significant upgrade if Roblox is to draw in older audiences and form a moat around its userbase, especially as other video games push become graphically indistinguishable from real life.
Wall Street's Take
Turning to Wall Street, RBLX stock comes in as a Moderate Buy. Out of 11 analyst ratings, there are eight Buys, two Holds, and one Sell assigned in the past three months.
As for price targets, the average Roblox price target of $116.90 implies 19.5% upside potential. Analyst price targets range from a low of $70.00 per share to a high of $150.00 per share.
Disclosure: Joey Frenette doesn't own shares of any mentioned companies at the time of publication.
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