Roblox Stock Valuation: Is it Still a Smart Buy Amid Legal Risks?

Roblox stock has surged 166% in the past year, but investors are questioning whether it's still a smart buy. User engagement metrics are strong, but looming legal challenges and valuation metrics indicate that the stock is not significantly undervalued. A Discounted Cash Flow model estimates Roblox's intrinsic value at $117.67 per share, only 0.1% undervalued compared to the current market price.

Roblox stock has been a hot topic among investors, surging by 166% in the past year. The platform's impressive user engagement metrics, with daily actives pushing toward 100 million and concurrent users hitting record levels, have fueled this growth. However, the stock's rapid ascent has also raised questions about its valuation and the looming legal challenges it faces.

Analysts have taken notice of Roblox's strong user engagement, with JPMorgan bumping its price target to $125 [1]. Yet, the company is facing significant legal challenges, including SEC investigations and lawsuits alleging inadequate protection for its younger users from potential predatory risks [2]. Louisiana Attorney General Liz Murrill has filed a child protection lawsuit against Roblox, claiming the platform allows the distribution of child sex abuse material and fails to implement basic safety controls [3].

From a valuation perspective, Roblox is only undervalued on one out of six key checks, giving it a value score of just 1. Using the Discounted Cash Flow (DCF) model, Roblox's estimated intrinsic value is $117.67 per share, only 0.1% undervalued compared to the current market price [1]. Despite this, the stock's valuation multiples are stretched, trading at a forward EV/EBITDA multiple of 66x, which raises concerns about its profitability challenges [3].

While Roblox's strong user engagement and growth trajectory are undeniable, its persistent profitability challenges and the legal headwinds it faces suggest that the stock is not significantly undervalued. The company's net loss of $279.8 million in Q2, driven by heavy R&D spending and substantial creator payouts, highlights the path to profitability that lies ahead [3].

Investors are advised to consider the potential risks and rewards before making a decision on Roblox stock. The stock's stretched valuation and legal challenges suggest that there is little margin of error for investors today. However, the company's strong user engagement and growth trajectory may present an attractive entry point for those willing to take on the risks.

References:
[1] https://ca.finance.yahoo.com/news/roblox-stock-run-too-far-100555533.html
[2] https://www.ainvest.com/news/roblox-faces-legal-backlash-safety-concerns-analysts-upside-potential-2508/
[3] https://www.tipranks.com/news/stretched-valuation-sparks-analyst-concern-for-roblox-stock-rblx