Roblox could jump 25% and offers investors exposure to multiple growth 'megatrends,' JP Morgan says

• JP Morgan's Alexia Quadrani tagged Roblox with an "overweight" rating and an $85 price target on Monday citing "megatrend" exposure.
• The price target implies a potential 25% jump in share prices from Tuesday's intraday low.
• A growing user base and increasing average revenue per user added to the analyst's bullishness.

Roblox stock could jump 25% and offers investors "exposure to multiple growth megatrends, including mobile gaming, social networking, user-generated content, and digital identity," JP Morgan analysts wrote on Monday.

In a note to clients, analysts led by Alexia S. Quadrani said that Roblox is set to outperform due to its involvement in key megatrends, its rising user base, and increasing average revenue per user.

The analysts initiated coverage of the online gaming platform with an "overweight" rating and an $85 price target in their note.

The price target implies a potential 25% jump in share prices from Tuesday's intraday low of $67.84.

Quadrani and her team said that pandemic restrictions have led to outsized increases in users and revenue per user at Roblox, but added that they expect an "up and to the right" progression from here.

The JP Morgan team also highlighted Roblox's dominance with a younger audience. Roughly two-thirds of Roblox users are under the age of 17 and spend an average of two and a half hours per day on the platform.

Quadrani said that this audience could provide Roblox another way to monetize its platform moving forward. Advertising for the hard-to-reach younger demographic could be lucrative for Roblox if they can maintain their customer base.

Besides advertising, the team of analysts also touched on Roblox's push towards a "metaverse." The "metaverse" is a collective, virtual shared space, created by the convergence of virtually enhanced physical reality and a virtual space.

The term is gaining popularity, and some investors are evening purchasing "digital land" on "metaverse" platforms like Decentraland for as much as $74,300.

Roblox has already held several high-profile concerts and teased applications in education and business communication for its "metaverse."

Even without revenue from the "metaverse" Roblox is set to outperform, according to Quandrani.

"We believe execution on this model alone can drive steady long-term returns for investors, with significant optionality tied to several drivers, including advertising, e-commerce, and the wider Metaverse opportunity," Quadrani wrote.

Quadrani's $85 price target comes from a 21x multiple on estimated 2022 revenue, which is a slight premium to Roblox's peers, the analyst said.