Running a digital entertainment platform can be a great business. As Netflix has demonstrated, once you reach a certain scale, you can turn user engagement into significant profit and gushing cash flows.
Roblox (RBLX 1.35%) and Roku (ROKU -10.29%) are both much earlier on in their growth stories. Today, the companies count about 70 million users each compared to Netflix's pool of 240 million subscribers. But sales and engagement trends are strong.
Wall Street has differing opinions about the two growth stocks, so let's take a look at which one is the more attractive buy right now.
The case for Roblox
Growth stock investors will find a lot to like about Roblox, whose platform connects creators of virtual experiences to an expanding pool of users. Bookings have risen by over 20% in each of the last two quarters, mainly thanks to fans' increasing demand for the virtual currency that powers its digital economy. Hours of engagement last quarter jumped 24% to cross 14 billion.
Roblox is attracting more users that fall outside of its core demographic that skews younger, suggesting a potentially huge addressable market in the long term. Management is also excited about the impact that generative artificial intelligence (AI) could have on the platform because it makes it easier for creators to make immersive and entertaining experiences.
The biggest pressure on the stock right now is Roblox's weak profit outlook. Net losses are widening, and management has forecast further losses ahead as the company prioritizes growth investments. The good news is that cash flow is positive, but it could be years before Roblox demonstrates real earnings power.
The case for Roku
Roku stock is performing much better in 2023 thanks to the combination of two positive trends. First, the streaming specialist's sales growth is accelerating as the digital advertising market recovers from its post-pandemic slump. Management says revenue should rise by over 20% in the current Q3 period compared to last quarter's 11% increase. Roku's engagement metrics have remained strong through that ad slowdown. Streaming hours jumped 21% last quarter to 25 billion, in fact.
The second big factor pushing the stock higher is management's commitment to return to profitability. Roku recently announced an aggressive restructuring program that includes layoffs of about 10% of its staff.
Combined with a push to make the platform more valuable to advertisers and content owners, this move is likely to help lift margins back into positive territory. Unlike Roblox, after all, Roku has generated significant operating profits in the past.
ROKU Operating Margin (TTM) data by YCharts
Both stocks have become cheaper since the pandemic, and that valuation decline makes sense given the recent net losses and slowing growth rates. Yet Roku's shares have trounced the market so far in 2023, rising nearly 80%, while Roblox's stock is down 8% through mid-September. The stock is valued at over 3 times annual sales today, close to its high for the year. Roblox, in contrast, is trading at 6.5 times revenue, or about half the rate that investors were paying earlier in 2023.
Roku still seems like the better deal here.
The streaming video specialist has a bigger, more diverse revenue base that includes hardware sales, subscription sales, and advertising revenue. Its platform is becoming more valuable thanks to innovations like its recent partnership with Shopify to allow for direct purchases from streaming ads.
And the business has a clearer path toward profitability over the coming years than Roblox, which has warned investors to expect continuing losses ahead. For growth stock investors, these factors should tilt the scale toward Roku today.
