Investors are warming up to Roblox (RBLX 1.35%) stock again. The entertainment platform reported strong third-quarter results in early November that have helped propel the stock to excellent year-to-date gains. Roblox investors are looking at nearly 40% returns, compared to the 14% rally in the S&P 500.
It wasn't all good news in the report, though. Roblox is still struggling to demonstrate a clear path toward profitability, for example. Yet investors will find more to like in this report than to be worried about.
Green flag: Engagement
Engagement is a foundational growth metric for any entertainment business, and Roblox is performing very well on this score. Its user base was up 20% in Q3, and hours of engagement rose at the same healthy clip, to 16 billion.
After revenue growth slowed last quarter, investors were concerned that Roblox would struggle with engagement this year. Yet demand trends bounced right back in Q3 instead. Sales growth accelerated to 38% from 17% in the second quarter. Bookings are a more useful metric to follow, since Roblox recognizes most purchases over an extended time period.
That figure has been steady all year, rising 20% or more in each of the last three quarters. "We delivered another strong quarter of growth while executing against our financial plan," CFO Michael Guthrie said in a press release.
Green flag: Cash flow
Roblox is generating plenty of cash, which is great news in today's era of expensive debt. Operating cash flow rose 60% this past quarter and has improved to over $300 million through the first three quarters of 2023, up from $250 million in last year's period. Roblox is now sitting on about $3 billion of cash and investments and roughly $1 billion of debt.
RBLX Cash from Operations (TTM) data by YCharts
These successes don't just mean that Roblox can fund its own aggressive growth initiatives without needing to take on more debt or issue additional stock. They also point to robust annual earnings ahead, assuming the company can scale its platform up to well beyond its current level of 70 million daily users.
Red flag: Losses continue
Investors looking for a quick move toward profitability will be disappointed by some financial metrics in this earnings update. Roblox reported $280 million of net losses in Q3. Losses so far for the year are sitting at over $800 million, compared to $600 million in the same period in 2022. Management had said in August that they were expecting losses to continue into the foreseeable future, and these numbers seem to confirm that financial challenge.
But executives changed their tune a bit in Q3. While stopping short of announcing a new cost-cutting focus, Roblox is now after a better balance between growth and profitability. "We slowed spending growth across most of our major expense categories," executives said in a shareholder letter. Hiring rates slowed, and Roblox spent less on a major cloud services contract after renegotiating its rates.
The stock spike
It makes sense that shares would jump in response to this report that paired stronger revenue growth and slowing spending rates. While Roblox is still operating in the red, investors can see light at the end of the tunnel.
If you're risk-averse, you might still want to watch the stock while management works toward achieving sustainable profitability. But Roblox is doing a good job at balancing growth and cash flow, making it more likely that shareholders will see positive returns from holding this growth stock over the long term.
