Roblox Stock: Buy, Sell, or Hold?

Roblox (RBLX 1.35%) dazzled the bulls when it went public via a direct listing on March 10, 2021. The gaming platform developer's shares opened at $64.50 and more than doubled to their all-time high of $134.72 on Nov. 19, 2021.

But today, Roblox trades at about $30. The bulls retreated as its bookings growth cooled off, its losses widened, and its leverage rose. Rising rates also compressed its valuations. So, should investors buy, sell, or hold Roblox today?

Image source: Roblox.

The key facts about Roblox

Roblox's gaming platform enables its users to create simple block-based games without any coding knowledge. They can then share those games with other users and monetize them to earn an in-game currency called Robux. That simple approach made it a popular gaming and social platform for tween users.

Roblox's growth accelerated throughout the pandemic as more students stayed at home and spent more time on their computers. That's why its bookings, which reflect its underlying sales of Robux, surged 171% in 2020.

However, that growth spurt set Roblox up for tough year-over-year comparisons as the pandemic ended. As a result, its bookings only grew 45% in 2021 and 5% in 2022.

But over the past year, Roblox's year-over-year growth in bookings, daily active users (DAUs), and total hours engaged accelerated again. The growth of those three core metrics offset its slower growth in average bookings per DAU (ABPDAU), which remained sluggish as it gained more DAUs in lower-revenue overseas markets to offset its slower growth in higher-revenue DAUs across the U.S. and Canada. That slowdown was exacerbated by a growing mix of older users who were more difficult to monetize than its younger users.

Data source: Roblox. YOY = Year-over-year.

Analysts expect Roblox's bookings to grow 19% in 2023 and 15% in 2024, but it's expected to remain unprofitable on a generally accepted accounting principles (GAAP) basis for the foreseeable future.

The reasons to buy or hold Roblox

The bulls still love Roblox because it established a first-mover's advantage in its niche market, it ended its latest quarter with 65.5 million DAUs, and it still doesn't face any meaningful competitors.

Roblox's business model is self-sufficient because it's a creator-driven platform like Alphabet's YouTube. So, as long as it keeps gaining new DAUs who are playing, producing, and monetizing new games, it can keep expanding. Over the long run, economies of scale could kick in and finally boost its profits.

As for Roblox's overseas and older users, it can monetize them more aggressively as they become more tightly tethered to its ecosystem. It could accomplish that by selling more integrated metaverse ads directly in its Roblox games or leveraging its new voice recognition and face-tracking features to make it easier to communicate with other users and turn Roblox's entire ecosystem into a more cohesive social networking platform.

Roblox's bookings are also still growing at a faster rate than its developer exchange fees -- the real-world currencies it pays developers when they trade in their Robux -- so it isn't being overwhelmed by its highest expenses yet. The company still isn't profitable on a GAAP basis yet, but its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) have stayed positive since 2021. All of these strengths suggest Roblox could keep growing.

The reasons to sell Roblox

The bears will argue that growth masks some serious financial problems. Roblox ended its latest quarter with over $1 billion in long-term debt, which gives it a jaw-dropping debt-to-equity ratio of 33 and just $520 million in cash and equivalents. Analysts expect its GAAP net loss to widen from $924 million in 2022 to $1.1 billion in 2023 -- and for the company to continue losing at least $1 billion annually in 2024 and 2025.

That high leverage and red ink will make Roblox an unappealing stock to own as long as interest rates stay elevated. Roblox's developer exchange fees might be stable, but its other big expenses -- including its cloud infrastructure fees and the development of new safety features for its younger users -- will prevent it from breaking even.

Roblox's stock also isn't a screaming bargain at five times next year's sales and 39 times its adjusted EBITDA. Unity, which develops a more advanced game engine for professional developers, trades at just four times next year's sales and 17 times its adjusted EBITDA. That higher valuation could limit Roblox's near-term gains.

Which argument makes more sense?

Roblox might keep growing for the foreseeable future, but I wouldn't touch the stock until it narrows its net losses, reduces its leverage, and consistently grows its ABPDAU again. If the company can't confidently check those three boxes, it will likely struggle to attract the bulls' attention in this unforgiving market for fallen growth stocks.