Is Roblox Stock a Buy Now?

Roblox's (RBLX -1.07%) stock price plunged 17% during after-hours trading on Aug. 9 following its second-quarter earnings report. The gaming platform company's revenue grew 30% year over year to $591 million, but its bookings -- which gauge direct purchases of its in-game currency Robux -- fell 4% to $640 million and missed analysts' estimates by $14 million.

That marked Roblox's slowest revenue growth since its direct listing last March and its second consecutive quarter of declining bookings. To make matters worse, its net loss widened year over year from $140 million to $176 million, or $0.30 per share, which missed the consensus forecast by $0.05. Its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) also plunged 70% to $55 million.

Image source: Roblox.

Those headline numbers were ugly, but some investors might be wondering if it's finally time to buy this former high-flying stock, which has already declined more than 70% from its all-time peak last November.

Why is Roblox's growth cooling off?

Roblox's gaming platform enables its users to create simple block-based games and share them with other players. Its creators can also monetize those experiences by selling additional in-game features for Robux.

That simple and self-sustaining approach, which doesn't require any coding knowledge, caught on with tween users. Its growth then accelerated significantly during the pandemic as students spent more time at home.

But as the lockdown measures were relaxed and students went back to school, Roblox's growth cooled off. That deceleration -- which can be clearly seen in its revenue and bookings over the past year -- suggested that the tween obsession with Roblox was merely a passing fad.

Data source: Roblox. YOY = Year over year.

Roblox's user growth also seems to be peaking. Its daily active users (DAUs) increased 21% year over year to 52.2 million in the second quarter, but that actually represented its first sequential loss of DAUs:

Data source: Roblox. YOY = Year over year.

As Roblox gains fewer users, its engagement rates are slipping. Its average hours engaged fell 4% sequentially to 11.3 billion, while its average bookings per DAU (ABPDAU) declined year over year for the fourth consecutive quarter.

Data source: Roblox. YOY = Year over year.

Brighter days could be ahead

Roblox is struggling, but brighter days could be right around the corner. For July, Roblox claims its bookings grew 8%-10% year over year as its revenue rose 25%-27%. Its DAUs increased 26% year over year to 58.5 million, its hours engaged grew 25%, but its ABPDAU fell 12%-14% as it continued to accumulate a higher mix of lower-revenue international users.

That stable guidance indicates it's still gaining more users throughout the summer, even as outdoor activities lure users away from its platform. Roblox's rebounding bookings also suggest that inflation isn't preventing parents from buying more Robux for their kids through a la carte purchases or subscriptions.

Roblox didn't provide a detailed outlook for the third quarter, but CEO David Baszucki said the company was still "driving record levels of users and engagement globally" as it expanded across additional geographies and age groups. That strategy is paying off: Roblox's fastest-growing demographic in the U.S. and Canada -- across both male and female users -- consisted of 17- to 24-year-olds during the second quarter.

Its losses are still worrisome

Roblox's top-line growth might stabilize, but its losses are still alarming. Its total costs and expenses surged 28% year over year in the second quarter and nearly overtook its revenue growth, which resulted in a negative operating margin of 28%.

That pressure will persist as Roblox tries to juggle its rising developer exchange fees (the cash it pays to creators who cash in their Robux), infrastructure costs, and safety-related expenses for children.

All that red ink could make Roblox unappealing as interest rates rise, and its high debt-to-equity ratio of 7.9 will make it tough to raise fresh funds at reasonable rates. Nevertheless, the company was still sitting on a comfortable cushion of $3.08 billion in cash and equivalents at the end of the second quarter.

Its stock isn't cheap enough yet

Analysts expect Roblox's bookings to increase just 4% to $2.85 billion this year, but its stock still trades at 10 times that estimate. Unity Software, another high-growth gaming platform company that lost its momentum in a post-lockdown world, is expected to generate a 22% revenue increase this year -- but its stock trades at 11 times that estimate.

Therefore, Roblox's stock can't be considered a bargain yet, and investors should avoid it until its core growth metrics improve sequentially and it stabilizes its losses.