The market may be up solidly this year, but it has lost interest in Roblox (RBLX 1.35%) stock. Over the past 12 months, shares of the digital entertainment specialist are deep into negative territory -- down 25% -- even though the business has been growing at a healthy clip in recent quarters.
Are investors missing something here? On the one hand, rising user engagement with its game platform is encouraging news. And there are other good reasons to like the stock today as well. At the same time, investors should also keep an eye on one big risk.
Let's dive right in and see where the stock could be headed from here.
Buy for the bookings
Part of the pressure on Roblox stock in 2023 has been that sales growth is slowing. Revenue gained 17% in the most recent quarter (after accounting for currency exchange rate swings), down from 24% in the previous quarter. Investors had been excited at the potential for accelerating gains this year following a post-pandemic slump. But that's not happening right now.
Roblox's online game platform gets most of its revenue from the sale of virtual currency, which is recognized over a period of about two years. That's why its bookings figure is a better one to follow with respect to growth. Bookings have been higher and more stable, rising 22% in the second quarter compared with a 25% increase in the prior quarter.
Roblox's other engagement trends suggest plenty of demand for its virtual experiences as well. The pool of daily users rose 25% last quarter, and total hours on the platform jumped 24% to 14 billion. "We continue to drive high rates of organic growth," CEO David Baszuki told investors in early August .
Buy for the discount
A big benefit from the recent stock price slump is that Roblox can now be purchased at an attractive discount. Its shares are trading at 6 times annual revenue, down from a high of 12 at several other points in 2023. The entertainment provider had even seen price-to-sales valuations as high as 38 during the high-growth phases of the pandemic.
Sure, this is a different world, and demand for digital experiences has declined significantly. But there are still exciting growth opportunities for this platform. Roblox connects content creators with users, and that means it could benefit significantly from an approaching boom in artificial intelligence (AI). Management is racing to incorporate generative AI features into the platform today, boosting the value for both creators and players. Success here could help the company capitalize on its growing base of users over time.
Sell for the earnings
The knock against Roblox that makes the most sense right now is its lack of profitability. That's a valid concern in a shaky economy and when high interest rates are making debt more expensive.
In contrast with streaming video specialist Roku, Roblox isn't taking aggressive steps to move toward profitability. In fact, management is projecting more red ink ahead as they keep their focus on growth. "We expect to continue to report net losses for the foreseeable future," executives explained in a recent shareholder letter.
Roblox isn't being financially reckless, though. The management team is holding itself to positive operating cash generation. There is roughly $2 billion of cash and investments on the books right now, too, with hardly any debt. In other words, Roblox is in a good position to continue funding its own growth, reducing the potential risk from rising interest rates.
As a result, investors might want consider this red flag to be more of a yellow one, giving this stock a good amount of bullish factors for 2023 and beyond.
