Why Roblox Stock Popped Today

Key Points

• Roblox stock is being sued by the state of Louisiana for alleged facilitation of "the distribution of child sexual abuse material."

• Roblox is responding to the claims and bolstering its safety efforts for child users of the online gaming platform.

• As litigation risk subsides, valuation risk continues.

• 10 stocks we like better than Roblox ›

Roblox (NYSE: RBLX), which operates an online gaming platform especially popular with teens and younger kids, saw its stock jump 7.8% through 11:20 a.m. ET Monday after receiving a positive appraisal from Wedbush analyst Alicia Reese.

According to Reese, Roblox stock, which costs less than $127 after getting hit hard earlier a couple of weeks ago on litigation concerns, could gain nearly 30% over the next 12 months.

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What Wedbush says about Roblox

Roblox is under fire from the Louisiana Attorney General's office for alleged "facilitat[ion of] the distribution of child sexual abuse material and the sexual exploitation of Louisiana's children." But Reese says that "notwithstanding a slew of recent and forthcoming hit pieces and legal action," Roblox stock is still a winner and "the most compelling" growth stock in the entire video game sector.

Addressing the litigation risk, Reese commends Roblox for moving quickly to protect its children-users online. Meanwhile, the company's Grow a Garden and Steal a Brainrot games "continue to drive significant engagement" among these users.

Is Roblox stock a buy?

Roblox is sticking with its forecast for 41% to 45% bookings growth in Q3, a metric that should translate into revenue and profits growth over time.

But that's just the issue: Roblox doesn't actually have any profits at present. It's lost money every year it's been in business, and analyst forecasts have Roblox continuing to lose money through 2029, if not longer. Although free cash flow positive, the stock still sells for an elevated 86.5 price-to-free cash flow ratio.

Even on a "41% to 45%" bookings/revenue/profit growth rate, that seems too expensive -- and until this changes, Roblox stock remains a sell for me.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roblox. The Motley Fool has a disclosure policy.