Roblox could soar 18% as it benefits from 2 'viral loops' that should drive monetization, Stifel says

• Stifel initiated coverage of Roblox on Monday with a Buy rating and $85 price target, representing potential upside of 18%.
• Roblox is exposed to two "viral loops" that should drive engagement and monetization, Stifel said.
• Roblox's large and growing ecosystem of users and developers bodes well for the company as digital content creation continues to pick up steam, Stifel said.
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Roblox received its first Wall Street analyst coverage on Monday, with Stifel rating the online gaming platform a Buy with a $85 price target, representing potential upside of 18% from Monday's close.

Roblox went public earlier this month in a direct listing on the New York Stock Exchange, and is currently valued at more than $40 billion. The stock is up more than 60% from its direct listing reference price of $45 per share.

According to Stifel, he company is primed to benefit from two "viral loops" that should reinforce Roblox's network effect and drive higher engagement and monetization on the platform: content and social.

"Digital content creation and usage have emerged as one of the most popular forms of entertainment, which combined with Roblox's large and growing ecosystem of users and developers, bodes well for the company," Stifel explained.

Roblox currently has more than 30 million users and 8 million developers that converge on an online social gaming platform where new games can be quickly created and take off like wildfire.

"The model is unlike any we've encountered," Stifel said of Roblox. Roblox is a gaming platform that features the toolsets to build content, a social media platform since the experiences on Roblox are highly social, and an entertainment platform as user generated content including gaming is a critical component, according to Stifel.

Besides the network effect inherent in its model, Roblox should also benefit from the strong growth in the video game industry, which is set to continue even after the COVID-19 pandemic, Stifel said.

But Roblox does face several risks, including difficult comparables in 2021 following a strong 2020, and potential safety issues for younger users, Stifel highlighted.

The derived its $85 price target by utilizing a 19-times multiple on its 2022 bookings estimate of $2.81 billion, according to the note.