A Wall Street Analyst Just Warned Investors That This Stock Will Issue Weak Guidance Later This Month. What Should Investors Do?

It's not common for a Wall Street analyst to warn investors that a company is likely to issue soft guidance when it reports its results, especially when they have an overweight rating on the stock, but that is exactly what Wells Fargo analyst Ken Gawrelski did earlier this month.

Gawrelski predicted that growth metrics for Roblox (NYSE: RBLX) will become increasingly more difficult for the company to achieve as it moves through Q2. As such, he forecast that the virtual gaming company's bookings will grow between 23% to 25%, which is below the 30% growth analyst consensus. Because of how Roblox records revenue, bookings are more reflective of the state of the company's current business than revenue.

Image source: Getty Images.

However, the analyst remains upbeat about Roblox's long-term prospects. He thinks its full-year guidance could still be achievable, while he likes the opportunity the company has in expanding its ad business. He thinks this will also help boost its margins over time. Nonetheless, Gawrelski lowered his price target on the stock from $97 to $78. It's the second time this year he has lowered his stock price target, reducing it from $107 in February after Roblox reported its Q4 earnings results.

So, what should investors do?

Even when reliable information is pretty widely available, I've learned investors shouldn't necessarily expect that to be baked into a stock's price. So even if Gawrelski is right and the data behind his warning is solid, I wouldn't bet on investors just shaking it off if Roblox issues soft Q2 guidance.

Meanwhile, I don't find Roblox stock appealing, even after a nearly 30% pullback this year. The company's business model is just not that attractive, and its use of stock-based compensation (SBC) is excessive. Make no mistake, Roblox is seeing strong revenue and bookings growth. Last quarter, its revenue rose 43% to $1.4 billion, while its books soared 63% to $2.2 billion. That's great growth.

However, its expenses are structurally high. It doesn't make the games and experiences on its platform, and as such, a large percentage of its revenue goes to these content creators. At the same time, it spends a boatload on hosting and platform moderation, and Apple and Alphabet end up taking a nice cut when a user buys its Robux virtual currency through one of their app stores. Meanwhile, to keep its own high-tech employees happy, it dishes out a ton of equity as compensation. When taking into account its SBC, the company is nowhere close to becoming profitable.

While the market doesn't always care about SBC, when it starts to, stocks like this get hit, and that has been the case recently. As such, Roblox is a stock I'd avoid both in the short and long term.

Wells Fargo is an advertising partner of Motley Fool Money. Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Apple, and Roblox and is short shares of Apple. The Motley Fool has a disclosure policy.