Growth Stock Keeps Retesting Key Ceiling

RBLX has come off its early-month lows

CFA, Senior Market Strategist
May 24, 2022 at 11:49 AM
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The below is an excerpt from this week's episode of Schaeffer's Playbook of the Week, featuring Schaeffer's Senior Market Strategist Bryan Sapp, CFA. Below, Sapp makes a short-term bullish case for Roblox Corporation (NYSE:RBLX).

"So this is a risky trade. I'll preface this by saying this is a risky trade. I think the risk-reward is there now and from a setup perspective, you have some structure to trade.

This is a gaming stock, a high-growth name. This is a company that I believe pretty strongly in long term. I think they're really going to be a big player in the gaming market, and Metaverse. But this is a laggard growth name. This was once a $100 plus stock, and it's trading way  down now. However, they reported earnings about a week ago, and RBLX is up 50% off the lows since earnings in a very short period of time, amid this broad market turmoil that we've been in.

The earnings report wasn't great. They reported some growth, however the headline numbers weren't blowout numbers, there was nothing to get super excited about in earnings report. The stock however, prices truth, and its been on a big, big rally ever since that earnings report, so maybe bulls are coming back into the fold and really scooping it up.

Additionally, if you look at those lows, look at the volume on the upside over the last two weeks; huge, green candles on the updates. It looks like you have big players that are starting to accumulate around this stock and or big players that are covering their short positions. Either way, we don't care. There's people, big hands, that are buying this stock. They're growing revenues of over 200% year over year. And they've done that for three straight years now. And their most recent year, they did about $2 billion in revenue.

These are big numbers, revenue wise, that are compounding quickly that are really growing fast. And again, despite the recent weakness, in the last 10 days, the put/call ratio of RBLX is in the 98th percentile of all returns taken over the past year. That's basically saying that option players now are more bearish on stock than they've been 98% of the time over the past year.

People are buying puts on a stock that is very strong fundamentally. That sort of skepticism, if you're a contrarian, you see negative sentiment and strong price action in the recent past, it could create some sort of unwinding effect for this stock. That's really interesting. You've got a sentiment backdrop that makes sense, if you're a contrarian; six of the14 analysts covering this name rate it a "hold" or worse.  We've talked about this time and time again, analysts are reactive. A stock goes down after the company reports horrible earnings, they downgrade, and vice versa.

So this stock has had a lot of skepticism toward it during this whole sell off, maybe now it's down enough and with the stock starting to reverse you might get some big analyst upgrades, you could get a big move higher if and when that would happen.

The primary reason I like this name here now is risk-reward. I think you can risk about three and a half, four bucks. And I think your upside is huge. So on a move below $27.50, a close below $27.50, I would say 'okay, that's that's no good.' This is a bad idea. However, my first overhead target is 40. I've mentioned the stock last week how it was on my watch list. And I had mentioned how I would expect resistance at $35 or $36. And that's actually what happened last week, the stock was up a bunch early, and then it found sellers at $35. That area, however, the more that area gets tested, and this is the same concept that we discussed with Microsoft and how they had it supported $270.

The more it gets tested, the more likely it is to break to the downside. The more this $35 level gets tested from underneath on Roblox, the more likely it is to get to the upside. So it's tested there twice, I would say on the next test, or maybe two tests down the road, it's going to break higher. So my overhead targets are $40 and $50. This is a name that if that works, you know if we do hit $40 and $50 I would definitely want to hold some shares in this long term. I think this is a very good spot to take a stab on something. If things cooperate, this is a stock that can have just a massive rally in a couple of weeks."

Join Schaeffer's Playbook of the Week now and tune in every Monday morning at 8:30 a.m. to get ready for the trading week with me. Click here for more information to get started.

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