Roblox (RBLX 1.35%) was a stock market darling during the 2021 bull market. Enthusiasm around tech-related stocks and optimism about the metaverse drew investors.
However, as a bear market set in and investors lost interest in the metaverse, Roblox stock plunged. Since then, it has failed to hold on to gains and trades at 52-week lows.
This drop doesn't mean all investors have given up on Roblox. Its increasing presence in the AI space and the introduction of advertising could serve as a catalyst for the entertainment stock. But that also leads to the question of whether it can finally build sustainable gains over the next three years.
The state of Roblox
Roblox is a metaverse-oriented gaming platform. Users can develop games and experiences through Roblox Studio, which brings people together through the Roblox community.
It built its initial following with children, and over half of its active users were under 13 as late as 2021. However, adults and professional developers have taken a greater interest in the platform, and now users age 13 and older make up about 57% of its daily active user base of 66 million.
Despite tepid interest in the metaverse, Roblox stands out increasingly with artificial intelligence (AI). Thanks to generative AI, Roblox Studio can now expand capabilities for digital editing, help with content creation, and increase the speed of iterations. This should help developers produce an improved product, regardless of a developer's skill level.
Additionally, Roblox has ventured into advertising. Through its platform, companies can purchase ads, choose an audience, and limit the duration of an ad, all while keeping a client within budget. It also offers immersive ads that can integrate into a user's experience.
Roblox's financials
Both AI and ads should lead to much-needed additional sources of revenue. Indeed, the $1.3 billion it reported in revenue for the first half of 2023 increased 18% from year-ago levels.
Unfortunately for Roblox, rising revenue seemed to generate more operating losses as costs and expenses surged 34% higher. This led to a net loss of $551 million in the first half of 2023, significantly more than the $337 million it lost during the same time frame in 2022.
Additionally, stock-based compensation and depreciation and amortization totaled a combined $497 million during this period. This means the company runs at a loss, even when removing non-cash expenses. This puts Roblox on track to lose approximately $1.1 billion for the year. With about $2.1 billion available in liquidity, Roblox may have to seek additional sources of funding by the middle of 2025.
Furthermore, analysts project losses to increase slightly in each of the next three years. That could mean that its price-to-sales (P/S) ratio of 7, which stands near record lows, may fail to induce investors to buy and hold.
Roblox in three years
Roblox's community, growing AI capabilities, and burgeoning advertising can potentially draw more user-base growth and revenue. Additionally, the single-digit sales multiple makes the stock appear inexpensive, considering its revenue growth.
Unfortunately, Roblox's seeming inability to stem its rising losses makes the stock cheap for a reason. With its struggles to adequately monetize its user base, the growth trajectory over the next three years remains uncertain for Roblox stock. It will be speculative until it can show investors a clear path to profitability.
