Roblox (RBLX 1.35%) entered the final quarter of 2023 with three catalysts that could send the stock higher. One of those was the recent launch on Sony's PlayStation console. But another catalyst is also starting to come to fruition: better control of operating expenses.
While revenue and daily active users continued to grow at high rates in the third quarter, cost discipline is starting to boost the company's bottom line. The stock is up 29% in the last month. Here's why market sentiment for the stock could set up a bull run next year and beyond.
What's the big deal about these expenses?
Roblox is a very popular platform, with daily active users growing to over 70 million in the quarter. But it has struggled to convert its revenue into profit, and the stock is down over 80% from its 2021 highs.
The company has invested heavily in technology infrastructure, developer fees, and personnel costs to drive growth. This contributed to a net loss of $277 million in the third quarter. But what many investors like to focus on is free cash flow, which is the actual amount of cash generated after paying all costs.
Image source: Roblox.
Roblox said it has completed the buildout of its new data center in Virginia. This led to lower capital expenditures in the quarter, pushing free cash flow up to nearly $60 million, compared to negative free cash flow in the year-ago quarter.
The trend toward lower operating expenses as a percentage of revenue could set up a bull run for the company's shares. In its quarterly letter to shareholders, the company stated, "While we intend to continue investing in innovation, we have reached a period where we can now moderate the growth rate of both our operating expenses and our capital investments."
Understandably, the market has reacted enthusiastically to this news just looking at the stock's high valuation. For most of the past year, the shares traded at a price-to-sales ratio between 6 and 12, which is expensive even compared to high-margin video game companies. A high valuation generally implies that investors expect strong revenue growth over the long term, in addition to a healthy profit margin.
With management signaling a pivot toward balanced top- and bottom-line growth, investors now have a good reason to buy at current share prices.
Why buy Roblox stock now?
With Roblox's improving outlook for profitability, investors can now focus on the strong numbers in other key performance metrics. Roblox said average monthly unique players reached 14.7 million, up 14% over the year-ago quarter. It also says that both returning and new unique players hit all-time highs, setting up for a strong fourth quarter.
Roblox will enter 2024 with momentum. Management said there have already been 15 million downloads on the PlayStation console since launching in October, which wouldn't have been included in the company's third-quarter results.
Another catalyst could come from improving user monetization. If there was any weakness in Roblox's Q3 report, it was the flat growth in average bookings per user, but this metric has stabilized after falling in 2022. At $11.96, it is well off the previous peak of over $17 per user. If this number starts growing again, that could significantly benefit the company's financial results, and the stock.
