Roblox (RBLX 2.47%) stock has returned to Wall Street's good graces in 2023 as investors turn their attention back toward growth. The digital entertainment platform is again reporting strong sales gains. That success has been tempered by reports of continued net losses. Smart investors should probably look beyond those headline results for clearer signs about Roblox's long-term potential.
With that goal in mind, here are three key factors about this business that smart investors know. These issues will matter most to the long-term bullish thesis for this company and its stock.
1. Engagement is a key metric for Roblox right now
At this stage in Roblox's growth story, engagement is a major priority. Roblox is first and foremost an online game platform and game creation system that allows users to program games and play games created by other users. It generates most of its revenue from the in-game currency these users exchange. Increased engagement is important for most entertainment platforms, but especially in this case where the company needs to attract both users and content creators so that it can create a virtuous cycle between the two groups.
There's strong evidence of this cycle at work today. Robox in mid-May reported a 22% increase in daily users year over year as that group crossed 66 million. Hours of engagement for the first quarter of 2023 rose at roughly the same year-over-year rate, reaching 14.5 billion.
And bookings, which mainly come from the sale of virtual currency, were up 25% year over year (after accounting for foreign currency exchange rate swings). "The momentum in our business demonstrates the success of our creator community," CEO David Baszucki said in a press release.
2. There are real reasons to expect losses will shrink
Many investors are understandably turned off by Roblox's net losses. This metric isn't moving in the right direction, either, having expanded to $270 million in Q1 from $160 million a year earlier. Operating losses grew, too, rising to $290 million from $151 million last year.
Investing is all about the future, though, and there are good reasons to expect this metric to improve over the next several years. Roblox is generating ample operating cash flow, for example, which is a better reflection of its earnings potential because it recognizes bookings over time.
Expenses are growing at a much slower rate than sales today, too, and management forecasts this trend will accelerate over the coming year or so. "We can now moderate our rate of investment in headcount and infrastructure thereby generating operating leverage," CFO Michael Guthrie told investors last month. Watch for these shifts to improve profit margins in the coming quarters.
3. Innovation is critical to Roblox's future success
The hardest part to forecast is Roblox's potential to continue innovating around its platform so that it becomes more valuable to content creators and users. Technology is moving quickly in this space, opening the prospect for rival platforms to capture additional share.
Roblox's incorporation of artificial intelligence and machine learning is a clear positive today. These tools are already boosting parts of the business like the advertising and development platforms. These improvements are making it easier for brands and content creators to make immersive digital experiences. Wall Street isn't as excited about the metaverse as it was a year ago, but Roblox is still establishing itself as a leader in this engaging entertainment niche.
Roblox stock offers a nice balance right now
Roblox's stock valuation seems attractive even following the recent price surge. Shares are valued at about 10 times annual sales, which is right in the middle of the range that investors have seen over the past year. Sure, there's room for that valuation to shrink significantly if sales growth slows or if management's ambitious plan to boost margins is delayed.
On the other hand, Roblox can easily earn that premium by simply continuing the positive momentum that investors have seen in the past few quarters. Ultimately, this growth stock offers a nice balance between risk and reward right now.
