Wall Street doesn't like to hear a company project net losses into the foreseeable future. There's even less of an appetite for red ink right now, as economic growth is slowing and interest rates are high.
These factors help explain why Roblox (RBLX 1.35%) stock, which had been a Wall Street favorite earlier in 2023, is now trailing the market by a wide margin. The digital-entertainment specialist told investors in its most recent earnings report that net losses aren't expected to end any time soon. There's more to the story than that, of course, but it's worth taking a closer look at Roblox's finances to ensure the business is still on a strong footing.
The loss projection
According to the average Wall Street pro, Roblox will lose $1.89 per share this year, representing expanding losses compared to last year's $1.81 per share of red ink. Losses should extend through 2024 at about the same pace, too.
These analysts are taking their cues directly from management. "We expect to continue to report net losses for the foreseeable future," executives said in an early August letter to shareholders.
It's not as bad as it sounds, though. Roblox is growing the business at a healthy pace, after all. Bookings have been up by 20% or more in each of the last two quarters. Engagement hours are on the upswing as well, and the company reported a 25% increase in its user base in the second quarter. In that environment, it makes sense for management to prioritize growth investments as it seeks to build up its scale.
Cash flow is solid
Roblox's management team isn't being reckless with their spending commitments, either. Today's elevated level of investment is contingent on two factors, they said.
First, it depends on continued high levels of growth. A slowdown in the company's bookings, which are driven by users' demand for virtual-currency purchases, would likely spark reduced spending on growth initiatives, like generative artificial intelligence (AI).
RBLX Cash from Operations (TTM) data by YCharts.
The second condition is cash flow. Roblox is generating positive operating cash flow right now, and management is aiming to keep that trend going. "We anticipate generating net cash provided by operating activities," executives said even as they predicted more net losses for 2023 and beyond.
Watch the stock
Given that context, investors might feel tempted by Roblox's cheaper price today. Shares are trading at below 7 times annual sales right now compared to a price-to-sales (P/S) ratio of over 12 earlier in 2023. That discount reduces the risk that you'll overpay for this growth stock, especially if it continues to attract more users to its platform at such a robust rate.
There's still no denying that shareholders would like to see Roblox at least demonstrate a path toward profitability. Netflix showed early in its pivot to streaming video that the business was capable of generating positive earnings, and operating profit margin is now hovering at close to 20% of sales. It's a lot less clear where Roblox could land on this key metric, even though cash flow is positive right now.
That's why investors might want to simply watch this stock for updates over the next quarter or two around growth and the evolving financial plan. Ideally, there will be good news on both scores when Roblox reports its Q3 results in a few weeks. But if its expansion rate slows, then management could announce a cost-cutting program that eases Wall Street's concerns about its net losses.
