Roblox (RBLX 1.35%) had been quietly trouncing the market in 2023, nearly doubling the 17% return that investors have seen in the S&P 500 through early August. That all changed following its recent earnings report that contained a few yellow flags about the business and its profit potential.
The stock's earlier spike was partly thanks to a rally in the tech market and among growth stocks in general. Yet Roblox had contributed to its own good luck as well by posting over 20% sales growth, along with impressive engagement metrics.
Investors have some new questions on sales trends now, though, and the earnings picture has darkened. Let's take a look at whether the stock might still be a buy following its recent drop.
The latest results
Wall Street was concerned with the fact that sales growth is slowing again after accelerating into early 2023. Year-over-year revenue gains fell to 17% from 24% in the prior quarter, potentially threatening a core part of the bullish thesis. Investors were hoping to see steadily accelerating growth, after all.
Engagement trends are still strong, though. Roblox's bookings were up 22% in the second quarter, or nearly as high as the prior quarter's 24% spike. And bookings describe the platform's growth better than sales trends because the company recognizes most of its revenue over time rather than at the moment a sale occurs.
Other metrics support the reading that Roblox is having no issues attracting more users or creators. Its pool of users jumped 25% to 66 million, and engagement hours were up 24% to 14 billion.
Financial challenges
The picture is more mixed around Roblox's finances. Cash-flow rates are strong, with operating cash flow reaching $202 million over the past six months compared to $183 million in the prior-year period.
But Roblox has made it clear that it is prioritizing growth over earnings right now. The company spent far more on operating expenses this quarter, in areas like hiring and research & development, so net losses expanded. The net loss was $283 million in the second quarter, up from a $176 million loss last year.
RBLX operating margin (TTM) data by YCharts. TTM = trailing 12 months.
Executives warned investors not to expect a quick change on this trend, either. "We expect to continue to report net losses for the foreseeable future," management said in a letter to shareholders.
Why buy the stock
The lack of sustainable profits today is a big reason investors might want to hold off on buying Roblox stock. It could be more than a year before that path toward profitability is clear, too, given management's comments.
Yet the stock isn't priced at too high a premium. You can buy Roblox for 7 times sales, down from roughly 12 times at other points in the past year.
Growth-focused investors might find that price attractive, considering Roblox's potential to greatly improve on its current base of 66 million users around the world. If you don't have a high risk tolerance, meanwhile, consider watching this stock into late 2023 for more-concrete signs of positive annual earnings ahead.
