Roblox (RBLX 2.87%) has an incredibly unprofitable business, with losses totaling more than $924 million last year. Investors could be waiting a long time before this gaming company gets to break even -- assuming it ever can. But there are three encouraging trends that suggest the business could continue to grow and improve its financials.
1. Hours engaged are still rising
Roblox's online gaming platform depends heavily on its having an active user base. Getting more people to use and play Roblox will, in turn, lead to more spending on the platform as well. And there's positive news on that front: Hours engaged were up 23% last quarter for the period ending March 31, hitting a record high of 14.5 billion hours.
Image source: Roblox Q1 investor presentation.
By having more people active on Roblox, more users can persuade their friends to also use the platform, potentially resulting in more daily active users.
2. Daily active users are also growing
An important metric for companies that run online platforms is their number of daily active users (DAUs). While a small segment of the user population could be generating a high number of hours engaged, the DAU figure can show whether that's in fact the case or if there's also a fast-growing community on the platform. In Roblox's case, it's the latter.
Image source: Roblox Q1 investor presentation.
Although Roblox's growth rate has slowed down over the years, it has remained relatively steady over the past several quarters, normally being above 20%. That persistent growth suggests there's a lot of appeal to prospective users. And given that the growth rate in DAUs is comparable to the increase in hours engaged, it could mean that it's the new users who are causing the increase in hours engaged. Sales totaling $655 million for the first three months of the year also rose by a similar rate -- 22%.
3. Cost of revenue is declining
User growth and engagement is positive, but a more pressing issue is the bottom line. Roblox needs to get its expenses under control. The good news is that at least with respect to cost of revenue, that appears to be happening. In two of the past three quarters, Roblox's cost of revenue declined when compared with the previous year.
Image source: Roblox Q1 investor presentation.
Although the costs did increase by 12% this past quarter, they were still lower as a percentage of overall revenue. A year ago, cost of revenue accounted for 25% of the top line, versus 23% now.
Cost of revenue is a key expense for Roblox, which includes payment processing fees of its virtual currency, Robux. While this can fluctuate, the company noted on its recent earnings report that it has been seeing more transactions on its website, which results in lower processing fees.
This is only a piece of Roblox's total operating expenses -- they totaled $945 million last quarter -- and so the company still has a long way to go to breaking even. But by bringing down its cost of revenue, that can result in better margins and ultimately create a potential path to profitability in the long run.
Is Roblox stock a buy?
Shares of Roblox are up 45% year to date, recouping some of the losses they incurred from a horrible 2022, when they were down 72%. Roblox has the potential to be an attractive growth stock to own, but investors may need to be patient with it, as it may take years for the business to become profitable, assuming it ever does. And at more than 10 times revenue, it isn't a cheap buy despite its sharp price drop last year.
The safest approach would be to wait and see how the business performs in future quarters to see if it can build on these trends and if they lead to better sales numbers and smaller losses. As of now, however, Roblox stock may still be too expensive and too risky to buy, and I'm not convinced that the current rally it's on will last.
