Video game company Roblox (RBLX 6.57%) has been struggling to generate growth lately, and its losses continue to mount. It was a hot buy a couple of years ago, when the metaverse hype was more intense and its online gaming world was being used to connect young people online during periods of social distancing. But in response to its underwhelming financials and top-line growth challenges, investors have been dumping the stock. It is now down more than 60% since the start of 2022.
This troubling sign should cause investors to be concerned that things may not get better for Roblox anytime soon.
The growth rate has nose-dived
When the tech company reported earnings in February, its fourth-quarter revenue totaled $579 million and was only up 2% year over year. Bookings of $899 million were up by 17%, and that included deferred revenue from the purchase of the company's virtual currency, Robux, which hadn't been used up during the period.
But while its bookings growth was encouraging, it wasn't reflective of how much people are spending and using on the platform during the period. (For example, people could have been buying Roblox gift cards during the holiday season, which their recipients will use later.) The revenue growth rate is more useful to gauge how much is being spent on the platform during a given period, and that metric has been declining sharply over the past year.
RBLX Revenue (Quarterly YoY Growth) data by YCharts.
The company's online gaming platform grew in popularity when people were staying home due to the pandemic, but its growth has come to a screeching halt. In Q4 2022, the number of hours engaged totaled 12.8 billion, 18% higher than a year earlier. But in Q4 2021, the growth rate was 28%.
Roblox will no longer report on monthly metrics
What is perhaps most concerning, however, is that the company will no longer report on monthly metrics. The business says it is making the change in order "to align our reporting cadence with our value of taking the long view." This change came as the company also announced that its estimated average bookings per daily active user (ABPDAU), a key metric, was down by as much as 2% from a year ago. It has been falling for multiple periods, and in 2022, ABPDAU declined by 14%.
NYSE: RBLX
Key Data Points
Roblox will still report on these metrics on its quarterly reports, but its decision to stop doing so monthly could suggest there will less of an emphasis on these metrics in the future, or perhaps that the company expects them to worsen. Management might think that by not reporting on them every month, it can minimize the bearishness surrounding the stock.
The business needs growth
A big problem with Roblox's business is that the company is nowhere near profitable, so a strong growth rate is important. In 2022, it incurred losses totaling $924 million on revenue of more than $2.2 billion. And the company's losses have been worsening.
RBLX Net Income (Quarterly) data by YCharts.
The lack of an improving growth rate may make it more difficult for investors to justify buying the stock. While its shares have risen by 37% thus far in 2023, that rally may not hold up if the company's growth rate continues to slow and its bottom line remains deep in the red.
Is Roblox stock a buy?
Roblox isn't the type of business I would be investing in right now. The company's platform targets children as young as nine, and with families tightening up their budgets in the face of inflation and fears that a recession may be on the way, parents are likely to more tightly limit how much their kids can spend on Roblox subscriptions and in-game purchases.
If the company is already struggling to turn a profit and generate growth now, the situation may not improve anytime soon. The big appeal around the business was its growth, and if that's still slowing down, the risk is that the stock could be headed lower in the months ahead.
Until the company can demonstrate a path to profitability, investors are better off avoiding Roblox. Its hefty valuation -- it now trades at 10 times revenue and 77 times book value -- makes it an incredibly risky gaming stock to hold right now.
