It is relatively rare to find a growth stock priced below $50 per share. Following a 13% rally this year for the wider market, only about 25% of the stocks in the S&P 500 fall under that threshold as of mid-June.
And while a stock price in isolation tells you nothing about the value of the business, many low-price stocks are riskier due to the companies' shrinking sales and/or weak profit outlook.
But growth investors can find strong businesses valued at less than $50 per share. Let's look at Roblox (RBLX -2.73%), for example, which recently gave its shareholders some excellent reasons to feel bullish about its digital entertainment platform and its potential for stock price performance.
Roblox is seeing accelerating growth
Roblox is an online game platform and game creation system that allows users to program games as well as play games created by other users. Its stock went public in March of 2021 at $64.50 a share and was briefly trading above $134 a share by November thanks to pandemic-related tailwinds. As the pandemic eased, the price fell on what might be considered a pandemic growth hangover and it now trades below its IPO price.
Roblox generates the majority of its revenue through the sale of an in-game currency called Robux (the rest comes from advertising, licensing deals, and premium membership subscriptions). Players use the currency to equip their game avatars, play certain games, to enter tournaments, and collect winnings. Those who create games can earn Robux commissions based on the amount of gameplay that is split with Roblox.
In late May, Roblox announced excellent sales results and positive momentum to generate strong sustainable profits. Bookings on its platform were up 23% year over year through late April, roughly tracking the growth in its user base and overall engagement. Users spent 14.5 billion hours interacting with its content in the first quarter, also up 23% year over year.
It's notable that this success came despite broader weakness in some digital entertainment niches like video games. "The momentum in our business demonstrates the success of the creator community," CEO David Baszucki said in a press release.
It also came on top of a strong prior-year period that saw sales rise 39%. That acceleration compared to late 2022 suggests that Roblox has put its pandemic growth hangover behind it.
Follow the cash
The biggest knock on the business is that it remains unprofitable. In fact, net losses expanded last quarter to $270 million from $160 million a year earlier.
RBLX cash from operations (TTM); data by YCharts. TTM = trailing 12 months.
Focusing on cash flow paints a brighter financial picture, though, and is more relevant to future income due to how the company books a lot of deferred revenue (it can't add the money spent on Robux to its financial balance sheet until the Robux is actually spent by the user). Roblox's operating cash flow has been positive -- and has improved -- in each of the last three quarters. The first-quarter result here was $173 million, contributing to a strong balance sheet. Roblox is sitting on about $3 billion of cash and no debt today.
Looking ahead
Management said in a conference call with investors that it expects to see further improvements to profitability over the following quarters as the business gains more scale. The real driver of long-term returns, though, will be the company's success at expanding its platform for both users and creators.
A flood of platform innovation over the last year or so has helped here, including by adding new immersive ad formats and incorporating generative artificial intelligence. There will be much more to watch in this space as Roblox makes it easier to create and enjoy interactive digital entertainment.
This stock isn't for risk-averse investors. Roblox is valued at about 10 times annual sales today despite having booked net losses in each of the last two years. It is progressing toward profitability, yes, but that push would be delayed by slowing economic growth in key markets like the U.S.
Still, engagement is stellar on Roblox's platform right now, and the business has a clear path toward higher profit margins over time. And its strong cash position and relatively low expenses should cushion it from huge losses if a recession develops over the next few quarters. In short, this growth stock is worth considering for your portfolio as it trades today for just around $40 per share.
