Roblox's (RBLX 1.35%) stock price plunged 22% on Aug. 9 after it posted its second-quarter earnings report. The gaming platform company's revenue rose 15% year over year to $681 million, while its bookings -- which reflect its underlying Robux virtual currency sales -- rose 22% to $781 million and exceeded analysts' estimates by $3 million.
But on the bottom line, Roblox's net loss widened from $176 million to $283 million, or $0.46 per share, which missed the consensus forecast by two cents. That earnings miss -- along with its slower-than-expected growth in daily active users (DAUs), hours engaged, and average bookings per DAU (ABPDAU) -- sank its stock.
Let's see what the bears and bulls will likely tell you about Roblox's latest numbers.
Image source: Roblox.
Reviewing the key numbers
During the second quarter, Roblox's DAUs grew 25% year over year to 65.5 million and its total hours engaged rose 24% to 14.0 billion. Yet that expansion was offset by its declining ABPDAU, which caused its total bookings growth to decelerate.
|
Metric |
Q2 2022 |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
|---|---|---|---|---|---|
|
DAU Growth (YOY) |
21% |
24% |
19% |
22% |
25% |
|
Hours Engaged Growth (YOY) |
16% |
20% |
18% |
23% |
24% |
|
ABPDAU Growth (YOY) |
(21%) |
(11%) |
(2%) |
0% |
(3%) |
|
Bookings Growth (YOY) |
(4%) |
10% |
17% |
23% |
22% |
Data source: Roblox. YOY = Year over year.
What the bears will tell you
The bears will point out that Roblox missed the consensus forecast for 65.8 million DAUs and 14.4 billion hours engaged. That miss was minor, but its declining ABPDAU suggests Roblox is still struggling to effectively monetize its DAUs.
Roblox's ABPDAU is slipping as it expands into more overseas markets and tries to gain older users to consistently grow its DAUs. Both of those cohorts generate lower bookings per user than its core audience of tween users in the U.S. and Canada. As a result, its ABPDAU in the second quarter also slightly missed the consensus forecast.
The bears believe Roblox's business model is unsustainable. It generates most of its revenue by selling its virtual currency, Robux, but it pays its creators hefty "developer exchange fees" when they trade their Robux back into real-world currencies. Its developer exchange fees rose 16% year over year in the second quarter and outpaced its 15% revenue growth. Roblox could potentially reduce those fees by altering the exchange rate for Robux, but doing so could alienate its top creators.
Roblox's infrastructure, trust, and safety expenses also jumped 42% year over year in the second quarter as it expanded its cloud-based infrastructure and added new safety features to protect its younger users. Those expenses should continue to rise as Roblox expands overseas and tries to mix more older users with its younger users.
All of that pressure reduced Roblox's cash and equivalents from $3.08 billion to $520 million between the second quarters of 2022 and 2023. It also ended the second quarter of 2023 with $1 billion in long-term debt, giving it a shockingly high debt-to-equity ratio of 32.2, and analysts expect its net loss to widen from $924 million in 2022 to $1.18 billion in 2023. Roblox's widening losses and high leverage could make it an unappealing investment as long as interest rates stay elevated.
What the bulls will tell you
The bulls believe Roblox will continue to grow as a creator-driven platform, similar to Alphabet's YouTube, as economies of scale kick in and narrow its net losses. They'll point out that Roblox doesn't face any meaningful competitors in its niche space of creating and monetizing simple games, and it has plenty of room to run as it expands its integrated advertising platform and convinces more brands to set up metaverse experiences on its platform.
As for its rising developer exchange fees, the bulls will note that they're only rising faster than its revenue and not its total bookings. They also believe the ABPDAU of its overseas and older users will gradually improve as it locks them into its ecosystem. Its rollout of new voice recognition and face-tracking features could also make it easier to communicate with other users and turn Roblox into a stickier and more cohesive social networking platform for the metaverse.
The bulls will also claim Roblox is reasonably valued relative to its growth prospects. Analysts still expect its bookings to grow at a compound annual growth rate (CAGR) of 16% from 2022 to 2025 as its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins (relative to bookings) expand from 12% to 14%. We should take those estimates with a grain of salt, but they look promising for a stock that trades at less than 6 times this year's sales. Unity Software, which provides more advanced game development tools, trades at about 7 times this year's sales.
Which argument makes more sense?
Roblox could continue to grow, but its flaws are impossible to overlook. Unless it meaningfully grows its ABPDAU alongside its DAUs and narrows its net losses, I believe the bearish thesis will remain more compelling than the bullish one.
