Where Will Roblox Stock Be in 1 Year?

Roblox's (RBLX -0.76%) stock price surged 26% on Feb. 15 after the gaming platform company posted its fourth-quarter report. Its quarterly revenue only rose 2% year over year to $579 million, but its bookings -- which more accurately reflect its growth by only counting its virtual currency sales -- rose 17% year over year to $899 million and surpassed analysts' expectations by $15 million.

Roblox's net loss more than doubled year over year from $143 million to $290 million, or $0.48 per share, but still cleared the consensus forecast by six cents. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased by 9% to $183 million. Those numbers weren't perfect, but Roblox's stock has already declined nearly 40% over the past 12 months.

Will its post-earnings pop pave the way toward a stronger recovery through the end of 2023?

Image source: Roblox.

Roblox's growth is finally stabilizing

Roblox's gaming platform enables its users to create simple block-based games without any coding knowledge. They can share those games with other players and monetize them to earn an in-game currency called Robux.

Roblox's growth accelerated during the pandemic as younger users stayed at home and played more games on its platform. But as the lockdowns ended and those players returned to school, Roblox's growth in bookings, daily active users (DAUs), hours engaged, and average bookings per DAU (ABPDAU) cooled off.

After soaring 82% in 2020, Roblox's bookings increased 45% in 2021 and grew a mere 5% in 2022. But if we look at the past five quarters, we'll notice that its growth rates gradually stabilized in the second half of 2022. In the fourth quarter, its DAUs rose 19% year over year to 58.8 million as its total hours engaged increased 18% to 12.8 billion.

Data source: Roblox. YOY = Year over year.

Both growth rates decelerated from the third quarter, but that slowdown was offset by a milder decline in its ABPDAU -- which only dipped 2% year over year (and rose 28% sequentially) to $15.29 in the fourth quarter. That's why its total bookings growth still accelerated from the previous quarter.

Roblox's ABPDAU declined over the past year as it pursued overseas and older users, who generally buy fewer Robux than its core market of younger users in the U.S. and Canada. However, the gradual stabilization of its ABPDAU indicates it's monetizing those international and older users more effectively.

Its growth could accelerate again in 2023

In January, Roblox estimates that its bookings increased 19%-21% year over year, its DAUs rose 19% to 65 million, its hours engaged climbed 19% to 5 billion, and its ABPDAU rose 0%-2%. If Roblox maintains that momentum in February and March, its growth could accelerate significantly in the first quarter.

During the conference call, CFO Mike Guthrie said Roblox's business was indeed "accelerating" as it attracted younger users, retained its "aged-up" users, and generated "incredibly strong growth" in its strategic overseas markets like Western Europe and East Asia. It's also been making progress in newer regions like Latin America and Southeast Asia.

Roblox didn't provide any guidance beyond January, but analysts expect its bookings to increase 19% to $3.4 billion for the full year, which would represent an acceleration from its 5% growth in 2022. However, its adjusted EBITDA is also expected to drop 18% to $293 million this year as it ramps up its investments.

While discussing those higher expenses, Guthrie reiterated Roblox's commitment to "hiring great people" and "investing in the infrastructure" to drive its long-term growth instead of aggressively cutting costs to boost its near-term profits. CEO Dave Baszucki also discussed some of Roblox's longer-term aspirations, including integrated ads and new voice and facial tracking features which should enhance user-to-user communication across its platform. Those upgrades could eventually make Roblox more of an advertising, social, and metaverse play akin to Meta Platforms.

But is its business actually sustainable?

Roblox's growth is stabilizing, but its stock still isn't cheap at 7 times this year's bookings. It's also still deeply unprofitable on a generally accepted accounting principles (GAAP) basis, and analysts expect its net loss to widen from $924 million in 2022 to $1.17 billion in 2023. Roblox is struggling to break even because it paid out 28% of its revenue as "developer exchange fees" -- the cash it pays its creators for converting their Robux back to real-world currencies -- in 2022.

Those fees rose 16% during the year and outpaced its bookings growth, and they can't be reduced without either raising the price of Robux for its players or reducing the trade-in value of Robux for its creators. That dilemma tells us that Roblox hasn't proven that its business model is sustainable. Roblox's stock might advance this year as investors focus on its accelerating top-line growth, but I don't think it will outperform the broader market unless it meaningfully narrows its GAAP losses.