During the recent bear market, tech stocks have taken the biggest beating. High-growth, unprofitable businesses have fallen out of the market's favor, and investors are paying the price. However, as the saying goes, it sometimes pays to be greedy when others are fearful.

Gaming platform company Roblox (RBLX 1.13%) is an exciting stock to look at right now. It's in an industry with undeniable tailwinds and has a product that millions of children enjoy daily. Despite being down 71% from its late 2022 high, the business performance over the past year has me thinking now might be the best time to pick up shares. Let's dig in to see why.

Aging up with its users

When Roblox came public in early 2021, one of the biggest questions surrounding the business was how sticky the platform would be as its users get older. In Q1 of 2021, only 49% of hours engaged on the platform were by users over the age of 13. Fast-forward to Q1 of 2023, and that cohort now accounts for 56% of hours engaged.

This improvement hasn't happened by accident. For example, Roblox has used its partnership program, called Game Fund, to help incentivize its creators to develop new content that is appealing to older users. As the graphics on the platform continue to improve, more games should be developed that help Roblox compete against the game console systems from its large tech competitors like Microsoft's Xbox and Sony's PlayStation.

Growing the number of users who stick with Roblox as they get older is an important indicator for investors to keep an eye on because it will help demonstrate whether Roblox is a fad or a business that can succeed over the long term.

Early days of advertising

While it has yet to become a meaningful part of Roblox's revenue, the company is exploring some unique ways to incorporate advertising into its business. Because several of Roblox's games are immersive metaverse experiences, it's pretty easy to advertise in the games, much like we experience advertisements as we move through real life. For example, a user might see a movie poster or billboard while moving through a virtual world.

On the less traditional side are the immersive branded experiences. Roblox already has partnerships with names like Nike, Vans, and the NFL, and users can enter these worlds to both play games and interact with products virtually.

Considering the millions of users and their collective billions of hours spent on the platform, advertising could be a good revenue stream for Roblox, so it will be interesting to watch this play out over the next several quarters.

Improving business performance

Over the course of its first year as a public company, Roblox experienced the same pandemic-induced pull-forward of users and revenue as many other "at home" stocks. For example, revenue growth approached or exceeded triple digits throughout 2021 before falling off over the last year as the world reopened.

Now that its results are no longer being compared to the pandemic-impacted quarters, they are starting to look less lumpy. Revenue increased for the second consecutive quarter in Q1 of 2023, while profitability and cash flow have followed a similar trajectory.

 

Q3 2022

Q4 2022

Q1 2023

Revenue

$518 million

$579 million

$655 million

Year-over-year revenue growth

1.6%

1.8%

22%

Gross margin

9.4%

9.7%

16.8%

Net loss

($298) million

($290) million

($268) million

Cash from operations

$67 million

$119 million

$174 million

Data Source: Roblox.

While this recent trend is encouraging, investors will want to see it sustained before they get too excited. That said, if Roblox can continue to grow revenue and improve margins and profitability, it will be better equipped to handle the current macro environment, in which raising capital is much more expensive.

However, management grades itself on bookings, and the trend there is even more impressive. Consider the year-over-year bookings growth over the last 12 months.

 

Q1 2022

Q2 2022

Q3 2022

Q4 2022

Q1 2023

Bookings growth

(3)%

(4)%

10%

17%

23%

Data source: Roblox.

Management expects bookings growth to outpace the cost of sales growth as well as infrastructure spending during fiscal 2023.

Cheaper but not cheap

Roblox currently trades for 10.4 times trailing sales, which isn't cheap but also is not unreasonable. It's also not far above its all-time low price-to-sales ratio of 6.5, seen in mid-2022.

Now that the company is past the pandemic boom in its results, the expectations are clearer. Considering the recent trends and the positive guidance on bookings, I think now is the best time to consider buying Roblox shares. There's risk with any investment, but the potential reward from today seems compelling.