Roblox's (RBLX 1.35%) stock is in the limelight lately after recovering more than 50% from its 52-week low of $24.88, thanks in part to the solid Q3 revenue growth it reported in early November.
Still, there's more to like about the company than the solid top-line numbers -- so much so that I've added the stock to my watch list.
Image source: Getty Images.
Roblox demonstrated the resilience of its business model
Roblox went public at just the right time in 2021. Two years ago, revenue was growing at high double-digit (and even triple-digit) rates amid global lockdowns due to the COVID-19 pandemic. Investors were delighted, sending the stock through the roof to around $135 per share (it now trades near $39).
But when global economies reopened and revenue growth stopped -- revenue was up just 2% year over year in the second half of 2022 -- investors abandoned the stock. Such a move was not unreasonable, considering Roblox's short track record and sizable losses.
Fortunately, things started to improve after hitting that bottom late last year. For instance, revenue growth reaccelerated to double-digit rates in the first three quarters of 2023, hitting a high of 38% most recently. Similarly, bookings rose 21% for those three quarters, indicating that users are still spending more money on Roblox's platform.
The company has also consistently generated positive operating cash flow in the last three years, even though the company has yet to turn profitable. It has done so because of its unique business model, generating significant cash flow upfront (primarily through the sale of Roblox's virtual currency), even though revenue recognition happens over time. In other words, Roblox is not short of cash and does not need external capital to sustain its growth.
The recovery this year affirms the validity of its business model, which benefited from but is not dependent on the pandemic boom. Besides, with its positive cash flow and solid balance sheet ($2.1 billion in cash, cash equivalents, and investments net of debts), the gaming company has plenty of resources to reinvest in the business.
Roblox is well positioned to sustain its momentum
Roblox almost tripled its quarterly revenue from $252 million in Q3 2020 to $713 million in Q3 2023, and there are reasons to believe it can sustain its growth for a while.
To start, Roblox's engagement numbers have steadily risen. For example, daily active users (DAU) have almost doubled from 36.2 million three years ago to 70.2 million in the latest quarter. The growth was broad-based across age groups and regions. Similarly, the time spent on Roblox's platform grew from 8.7 billion to 16.0 billion hours.
As engagement improves, Roblox will be in a prime position to monetize this ever-growing user base. For perspective, monthly unique payers in the third quarter almost doubled from 8.8 million in 2020 to 14.7 million in 2023. With more money coming in, Roblox can reinvest in content, infrastructure, and research and development to improve the user experience, attracting and retaining even more users over time.
Moreover, Roblox is expanding into huge markets like India and Brazil to help it reach its long-term vision of 1 billion DAU. Last quarter, Roblox's India DAU and bookings grew 53% and 76% year over year, respectively. Similarly, Brazil's DAU and bookings grew 23% and 62%, respectively.
With just over 70 million DAU, Roblox has just touched the tip of the iceberg, leaving it with a massive growth runway.
What it means for investors
Roblox's recent performance gives investors more confidence in its long-term growth story, especially as it pushes into important new markets.
Besides, the company has recently guided that it would drive operating leverage in the near future, keeping operating costs and capital investments growth at or below bookings growth rates. It also expects to keep generating free cash flow in 2024.
I will be closely tracking Roblox's engagement metrics and financial performance in the next few quarters. If it can sustain this positive trend, I'll be initiating a position in the stock.
