Shares of Roblox (RBLX 1.43%) surged immediately following the company's better-than-expected earnings report on Feb. 15. Roblox reported strong numbers across key performance metrics, including daily active users and bookings (a non-GAAP measure of revenue).   

The stock is currently up 30% year to date after giving back some gains. Valuation concerns are front and center again with interest rates on the rise, which tends to pressure the premium investors are willing to pay for expensive growth stocks. Roblox may need to show more growth to justify its expensive price tag.

Let's look at one area of its platform that could help Roblox do just that.

An older player base is good for the bottom line

For most of its history, Roblox relied on tweens to drive growth. While users under age 13 still made up a large percentage of the company's 58.8 million daily active users (DAUs) through December 2022, users between the ages of 17 to 24 continue to join in droves. In the fourth quarter, 17- to 24-year-olds were the platform's fastest-growing demographic, up 31% year over year and accounting for 22% of all DAUs. 

Growth in older users is an enormous opportunity, as management has emphasized for a while. Older users don't have to ask their parents for money to buy virtual currency, or Robux, to unlock premium content. They tend to have more money to spend than younger users, which is healthy for Roblox's business. The 17- to 24-year-old demographic now makes up 22% of total bookings.  

We can see how Roblox's user composition is trending by looking at the shift over the last three years. In 2019, players older than 13 made up 40% of daily active users. Now, 55% of the base are users over 13. Roblox will continue to see older players join as management invests in higher graphics fidelity avatars, and as developers respond to the aging base by creating more mature experiences that appeal to the older crowd.

It's a positive cycle of older players spending more money, driving improving financials for the company, which it can reinvest in new experiences and features that keep attracting older players.

In fact, a huge opportunity to grow the platform is management's vision of how Roblox can help shape the future of communication. Roblox is investing in new animations for avatars that communicate with voice and facial animation, which management believes is the next big innovation in communication following video and texting. 

As Roblox introduces new ways for users to express themselves on the platform, it unlocks lucrative opportunities in the Roblox marketplace. The marketplace is where users buy clothing and other items to customize their avatars. Roblox continues to get better at monetizing its players, as is evident from the jump in bookings last quarter.

A bar chart showing a 17% year-over-year increase in Roblox bookings last quarter.

Image source: Roblox.

Bookings grew 17% year over year, while accelerating 28% over the third quarter. Management demonstrated good expense discipline, too, so the acceleration in bookings drove a significant improvement in profitability. In the fourth quarter, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped to $183 million, up from $51 million in the previous quarter.

The stock is expensive

If it wasn't for its already expensive price tag, the strong financial results might have supported the stock over the last week. But as concern over higher interest rates overtook the broader market sentiment, the stock gave back nearly all its post-earnings gains. 

Roblox may need to string together several quarters of sequentially improving bookings and adjusted EBITDA to get the stock moving higher. On a price-to-sales basis, Roblox trades at a higher valuation than other leading video game stocks, as well as social media giant Meta Platforms.

Chart showing Roblox's PS ratio higher than those of several other tech entertainment companies in 2022.

Data by YCharts

Roblox can deliver returns from its current price level, but investors will have to be patient. If management continues to execute and demonstrate expense discipline, continued growth in adjusted EBITDA could lift the stock higher. This is a catalyst to watch as the year progresses.

Investors who are looking for stocks that offer near- and long-term return potential might want to wait for a better price before buying shares of Roblox, especially when there are potentially undervalued growth stocks available.