There's no telling which way the market, let alone a single stock, will move in the short term. Stocks can decline one week on seemingly good news, and they can rally the next for no identifiable reason at all.
Zoom out over a multiyear period, though, and your odds are a bit better at predicting a stock's path. Companies that can pair decent sales growth with improving financial metrics, in general, will produce solid returns for investors. These returns might be even more impressive if Wall Street has low expectations for the business, too.
It's fair to say that investors are feeling that caution about Roblox (RBLX 1.35%) today, given slowing consumer spending patterns heading into late 2023. But what are the trends that will really power long-term returns for this digital entertainment platform provider? Let's look at some factors likely to influence Roblox's path over the next several years.
It's all about engagement
Wall Street wasn't thrilled to see that Roblox's sales trends decelerated in the most recent quarter, falling to 17% from 24% at the start of the year. But bookings, which are a better measure of demand trends for Roblox's virtual currency, remained strong. They've expanded at an over 20% rate in each of the last two quarters, in fact. Other engagement metrics like user growth and hours of engagement were similarly solid.
Roblox needs to maintain these high rates of growth over the next several years so that it can meaningfully improve on its current base of 66 million users. That's a tall order, but management is hopeful that generative artificial intelligence (AI) will help. Creators should have an easier time making engrossing virtual experiences, for example, adding value for them and for their audiences.
Financial wins
The biggest knock against Roblox stock today is the company's lack of profits. Net loss in the first half of 2023 ballooned to $551 million from $337 million a year earlier, and executives are predicting continued losses ahead as they invest heavily in the business.
There are a few ways that the story can change here and boost the prospects for investors. Roblox could become more profitable over time as its investments support increased scale. Cash flow is positive, after all, and so management has some flexibility in targeting growth.
Alternatively, Roblox might choose to shift into a more defensive posture by cutting costs. That's the path that Roku took recently, and Wall Street has responded by pushing the stock much higher in 2023. The best-case scenario for Roblox investors over the next few years is for the business to maintain solid sales growth trends even as management takes bigger steps toward establishing sustainable profitability.
The price check
Roblox shares are priced to reflect the mixed outlook that Wall Street analysts have for the business. Sales are predicted to rise by about 18% while net losses expand to $1.88 per share from $1.55 per share a year ago. The stock's price-to-sales ratio is sitting at where it started the year. Shares are valued at 8 times annual revenue, down from 2023 highs of closer to 12.
That valuation drop could set the stage for excellent returns from this growth stock, but only if Roblox can keep expanding its user base even as it finds ways to monetize the 14 billion hours of engagement that occur each quarter on its platform. Otherwise, shareholders will likely be disappointed with Roblox's stock in the next few years.
