Roblox dips 7% as Atlantic hits sidelines on softer engagement (NYSE:RBLX)

Roblox Developer Conference 2019

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Roblox (NYSE:RBLX) has slipped 9.7% alongside a rough open for the broader market as Atlantic Equities cuts to Neutral, pointing to softening trends in engagement.

The company’s taking the right approach to boost its focus on monetization, analyst Kunaal Malde says, and booking trends should improve amid easier comparisons from here.

But download trends are getting weaker, pointing to “softening” engagement in core markets for the near term, Malde adds.

“Investors have been concerned that all of Roblox’s engagement growth is now coming from lower-ARPU (average revenue per user) international markets, while usage in North America has stagnated,” Malde says. “Management believes there is room for engagement growth even among its core young U.S. demographic,” but “Even the faster growth, less mature international markets such as Japan show broadly stable trends relative to other apps, rather than demonstrating positive momentum.”

There are particular monetization catalysts in search and discovery, advertising, and the user-generated content catalog. But recent initiatives haven’t panned out as quickly as expected, and growth in the number of payers has stalled, suggesting that shifting to lower-ARPU markets isn’t the only monetization headwind.

Free cash flow was 17% of bookings in the first quarter, better than expected, but likely benefited from working capital timing – and an unsurprising reduction to single-digit conversion rates could weigh on Roblox stock (RBLX) in this market, Malde says.

A downgrade might not look timely given some already poor performance – and year-over-year bookings growth probably “bottomed” in March, Malde says. But many pandemic beneficiaries are also going through similar difficult transitions, and Roblox’s valuation (growth-adjusted) looks worse off than peers on gross profit and free cash flow yield bases.

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Atlantic has cut its price target to $30 from $60, vs. a current $27.44.

Industrywide, videogame sales fell year-over-year for the sixth straight month in April.