Jthere are very few stocks whose chart better indicates what’s been happening in tech over the past six or seven months than Roblox (RBLX). At the end of last year, optimism abounded. The “end” of the pandemic seemed in sight and the economy was booming. Growth and potential were everything, and the only risk people were aware of was the risk of missing out. And then things changed.
The Fed has made it clear that even it has accepted that inflation is not transitory and that rate hikes are coming; supply chain issues got worse, not better; Russia invaded Ukraine; crude hit $130 a barrel; and growth has become a dirty word. Stocks that had soared, such as RBLX, fell. However, just as there was evidence that the jump was exaggerated, so is the fall.
Much of this belief is based on the chart and, admittedly, a few days ago I wrote an article here explaining why chart analysis could be misleading and sometimes dangerous for investors. In it, I’ve talked about the dangers of placing too much reliance on complex chart patterns, and I stand by that.
But there’s one way charts can and should be used by everyone: to give a general impression of the sentiment around a stock at any given time. The RBLX array certainly does that:
The stock hit nearly $80 just days after its March 2021 IPO, then settled into a range that essentially held until November of that year, when it took off. . The perception of Roblox has shifted from something of a tech-driven toy company to one of a metaverse player.
Earlier this year, as the general economic situation deteriorated for all the above reasons, others also began to question the potential of the metaverse. “Metaverse” has become almost as much of a swearword as “potential” and “growth,” so stocks that had risen based on their growth potential within the metaverse had a triple whammy on them, and most fell. are collapsed.
In the case of RBLX, however, the stock fell back about 40% below where it had traded fairly well before the spike, which doesn’t make much sense. Partly what has happened is that Roblox has become more cautious about its immediate future given the macro environment, analysts have gone from overly optimistic to overly pessimistic. Revenue growth forecasts now average 1.1% per year for the next five years, after 83.5% in their first year as a public company. This assumes that their gaming business will completely dry up and none of the investments made at Roblox to diversify away from their core will pay off. This could be what is happening, but is it likely?
Of course not. Even though the “metaverse” is more of a buzzword than a business opportunity, the fact remains that interconnected online services and platforms have value, and the unlocking potential should have its own value reflected. in stock prices that have the technology and the know-how to unleash it. If you look at the RBLX chart, it looks like the $70-90 range traded from July to November was its “neutral” price before its exaggerated moves. Just getting back to the bottom of this neutral range would equate to an increase of over 55% from current levels, and that’s probably a more realistic price.
Buying RBLX is still a risky game in some ways. Sentiment rather than logic has driven it lower and lower, and buying here assumes logic will eventually win out, but there are no guarantees when it will happen. Still, with that 55% upside and a logical stop-loss level just below the $36.04 low representing a potential 20% drop, the odds are favorable enough that a logic bet here looks like at a decent bet.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.