Short sellers have been forced to retreat due to Roblox Corp.’s (NYSE:RBLX) astonishing gain, which has encouraged optimistic investors to buy the company as demand for its video-game platform has increased.
Analysts Have Raised Their Price Targets on Roblox
Since the middle of May, Roblox stock has roughly doubled in value, ending a six-month losing skid. That has encouraged bears who had gambled against the stock to pull back. According to S3 Partners, shorts have been lowering their positions in Roblox lately, buying 876,000 shares for $42 million over the past 30 days.
Roblox stands noteworthy because the company was a symbol of the metaverse craze that engulfed Wall Street in late 2021, although many technology stocks have made significant gains in the market recovery of recent months. The stock crashed as investors fled riskier assets this year, but since the benchmark’s bottomed out in June, it has outperformed peers, exceeding every component of the tech-heavy Nasdaq 100 Index.
This volatility most likely won’t go away anytime soon: While supporters like growth-stock guru Cathie Wood’s Ark Investment Management see it as a significant player in the metaverse, virtual worlds where users can socialize, play games, and conduct business, short sellers continue to wager that the money-losing company will struggle to build a profitable business any time soon.
According to Gal Munda, an analyst at Wolfe Research, the long term, and the short term are definitely at battle with one another. According to him, the metaverse is still at least five years away for the company and Roblox’s pandemic-driven growth is slowing down. He began coverage of the stock on Wednesday with the equivalent of a Hold rating.
The platform of Roblox is designed for preteens and teenagers who use the website to play games for free. Users that purchase Robux, a virtual currency used for in-game purchases, give the company money. However, it aspires to create a virtual universe with activities like a 50,000-person virtual concert with simulated audio and visuals.
The company last week disclosed bookings for the second quarter that fell short of analyst expectations, but analysts immediately predicted a pickup in July. Following the findings, at least 14 brokers increased their stock price estimates, including Morgan Stanley, Citigroup Inc., and JPMorgan Chase & Co.
Tejas Dessai, an analyst at Global X, a manager of exchange-traded funds, which includes Roblox as the largest holding in its video-game and esports ETF, said “The market believes that the Q2 miss was a near-term hiccup.” He said that the quarter “had plenty of bright spots.”
Short Sellers of Roblox Are Under Pressure
Although Roblox stock is still down 55% for the year, investors like Wood have kept buying. Her ARK Innovation ETF steadily expanded its holdings this month, purchasing around 147,000 shares.
The pressure on short sellers, who borrow shares and sell them in the hopes of repurchasing them at a lower price to profit from the difference, is increased. They close out their bets to limit their losses when the stock appreciates.
Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, said: “If Roblox’s stock price gets reinvigorated and pushes past March highs, we may see the rally continue in earnest and squeeze even more shorts out of their trades.”
Most stock analysts still have high hopes for Roblox’s long-term prospects, with 15 ratings of the company as a Buy, 9 as a Hold, and 2 as a Sell. The San Mateo, the California-based company, which went public in March 2021 at $45 per share, is currently trading at or near that mark.
The pessimistic scenario is that the metaverse may end up being a fad that falls short of its proponents’ expectations, and Roblox may never again experience the kind of growth it did while most of the globe was locked down. Additionally, the US may experience a short-term recession, reducing overall consumer expenditure.
This week, Munda stated in his report that “The excitement around the Roblox metaverse will continue to be muted until new technological progress is made.”
Featured Image: Megapixl @Rimidolove
