Wall Street doesn't seem to know what to make out of Roblox's (RBLX 1.35%) business prospects right now. The digital entertainment platform's stock was up by over 50% at one point in 2023, yet shares are now in negative territory and underperforming the wider market through late August.
Two factors, slowing growth and persistent net losses, seem to be weighing down shareholders' returns this year. These challenges aren't as worrisome as they might appear, though. And Roblox has a bigger trend, engagement, working in its favor today. Let's take a closer look.
Pressure on the business
Most of the selling pressure on the stock is the result of Roblox's August earnings report, which showed revenue gains slowing to 17% in Q2 from 24% in the prior quarter. That's not an indication that the platform is losing sway with users and content partners, though. On the contrary, bookings trends are holding at above 20% year-over-year growth.
Bookings are the more instructive metrics to follow here because Roblox mainly sells virtual currency to its users, and those sales are recognized over time rather than at the moment that the transaction occurs. The good news is there's more stability on this metric, as bookings growth ticked down to 22% in Q2 from 25% in the prior quarter.
Engagement trends are strong
Other engagement trends tell a similar story of a platform that remains a popular entertainment destination for nearly 70 million people. Roblox's base of paying users rose 19% in Q2, for example, and the total hours of interaction time jumped 24% to 14 billion.
These figures confirm that Roblox's expansion strategy is working today, despite those volatile quarter-to-quarter shifts in revenue gains. "We continue to drive high rates of organic growth," CEO David Baszucki told investors. "We are growing among users of all ages and across all geographies."
Don't expect profits
Investors shouldn't expect that growth to translate into sustainable earnings any time soon. Management warned in a letter to shareholders that net losses will continue "for the foreseeable future," in fact, as Roblox prioritizes investing in its growth initiatives. Net loss in the past six months landed at $555 million, up from $341 million a year earlier.
RBLX Net Income (TTM) data by YCharts
Executives aren't spending with abandon, though. The elevated spending is being driven by strong booking trends, so it makes sense to continue feeding that virtuous cycle when it is clearly working. Roblox aims to keep generating positive operating cash flow, too, effectively adding a constraint to its spending initiatives. There's nothing wrong with measured investment that's translating into faster growth at this point in the platform's expansion story.
Of course, it is possible that Roblox's booking trends will decelerate further and fall below that crucial 20% rate that constitutes strong growth. Wall Street would likely punish the stock even more at that point, especially given its record of net losses.
But the stock is being valued today as if that downturn has already happened. Investors are paying 7 times sales for this growth stock, down from 12 times sales in early 2023. It might turn out to be a steal in retrospect if Roblox simply maintains the positive momentum that the business has seen through the first half of 2023.
