Investors were disappointed with the latest earnings results out of Roblox (RBLX 1.35%). The digital entertainment platform specialist achieved another quarter of strong customer engagement in the selling period that ran through late June. Yet Wall Street chose instead to focus on the company's decelerating sales growth rate as compared to the prior quarter.
Smart investors know to look past quarter-to-quarter volatility in favor of more enduring factors like customer loyalty, scale, and brand power. Let's take a closer look, then, at three things that really matter about this business and that will likely determine whether shareholders see good returns from the stock over time.
1. Bookings tell the real growth story for Roblox
Wall Street focused on Roblox's slowing sales growth as a potential cautionary flag. That's understandable given that shares had rallied in 2023 partly on the expectation that revenue would continue its positive trajectory. Sales rose just 2% year over year in Q4 but rebounded to a 22% year-over-year increase in Q1 of 2023. Q2's 15% year-over-year jump was a letdown by comparison and it pressured the stock price immediately following the earnings announcement.
Bookings are a better gauge of growth trends, though, because most of Roblox's sales are recognized over a long period. And booking trends were solid, although they still decelerated slightly. Bookings were up 22% year over year this quarter compared to 25% year-over-year bump in the prior quarter. This increase was comprised of a 19% year-over-year increase in paying users, plus a 3% uptick in average spending. "We had a strong bookings quarter," executives said in a letter to shareholders.
2. Engagement is critical for Roblox's long-term success
At this stage in Roblox's growth story, healthy engagement by its users is critical to boosting its scale and eventually achieving management's ambitious long-term goal of welcoming over 1 billion active users (compared to just 65 million today). Progress was encouraging on this score in Q2.
Hours of engagement landed at 14 billion, up 24% year over year in Q2 to mark an acceleration over last quarter's 23% boost. Management said there was growth in all of its geographies and demographics, but that engagement levels are rising especially fast among older users.
Wall Street might have liked these figures to be higher, but there's no sign that Roblox is struggling to attract either content creators or fans of digital entertainment.
3. Roblox's net losses are here to stay
The news wasn't as bright around reported earnings. While Roblox continues to generate positive cash flow, and growth in some major expense categories is starting to slow, net losses expanded in Q2. Over the past half year, these losses landed at $555 million compared to $341 million a year earlier. Management said this increase was due to their growth investments aimed at supporting the business.
Management also warned investors not to expect a shift to positive earnings any time soon. "We expect to continue to report net losses for the foreseeable future even as we anticipate generating net cash by operating activities," the company explained in a letter to shareholders.
It takes a high risk tolerance to own this stock
The prospect of continued losses ahead, plus uncertainty about Roblox's growth rebound trajectory, had investors feeling skittish about the stock. Shares gave back nearly all of their 25% year-to-date gain in the initial hours following the earnings update.
Yet the growth thesis hasn't changed in any fundamental way. Roblox is still expanding its platform while focusing on cash flow over reported profits. That's why investors with a high-risk tolerance might want to add the stock to their watchlists as it hits the discount aisle.
