Investors are about to learn a lot more about Roblox's (RBLX 1.35%) momentum heading into 2024. The online gaming platform is due to report its fourth-quarter results on Feb. 7 in an announcement that will also feature management's official outlook for the new year, a first for the company.
The stock has been volatile recently. Roblox shares are 69% below the all-time high they set when the pandemic was fueling fantastic growth for the company, but they surged 85% in the last two months of 2023 before giving up some of those gains in the new year. These swings reflect uncertainty around the company's near-term prospects. But investors should focus on the bigger trends likely to drive the business's results over the next several years.
1. The growth picture is mixed
The best reason to like Roblox stock in 2024 is the company's impressive momentum. Revenue soared 38% year over year in the third quarter compared to a 15% increase the previous quarter. Most Wall Street pros are expecting sales to rise 19% in full-year 2023, and they're forecasting a similar result in 2024.
Looking beyond those headline numbers reveals some challenges worth keeping an eye on over the next few quarters. Roblox's bookings growth slowed from 22% in Q2 to 20% last quarter. User growth decelerated as well, falling from 25% to 20% over the same period, while hours of engagement followed a similar path. Users spent 16 billion hours on the platform last quarter, up 20% year over year, but that was down from a 25% jump in Q2.
None of these metrics threaten the wider growth thesis, but investors will still want to see Roblox's main engagement trends stabilize or accelerate in the near future.
2. It's tilting toward profitability
It's too early to know for sure, but there are good reasons to expect Roblox to move closer to profitability in 2024. Management has warned investors to expect net losses for the foreseeable future as the company invests in growth initiatives like content developer payments. Yet a few key metrics suggest improvements to the bottom line are on the way.
The biggest one is cash flow from operations, which jumped 68% year over year to $112.7 million in Q3 and continues to rebound from the lows the company set as the public health emergency phase of the pandemic came to an end last year. Combined with strong bookings trends, this boost helped Roblox report a rare improvement in its quarterly net losses.
CFO Michael Guthrie said in the most recent earnings release, "While we continue to invest in innovation, we are now entering a new phase where we can slow the growth in operating expenses and capital expenditures, thereby generating operating leverage and free cash flow."
The video game specialist may still be generating lots of red ink, but watch for improvements to its bottom line starting in 2024.
3. The stock remains expensive
Investors should temper their expectations for Roblox stock's short-term gains. While it's possible its sales and engagement trends resume accelerating, shares are priced at a hefty premium of 9.6 times trailing revenue right now. For comparison, you could instead buy highly profitable digital entertainment platforms like Netflix and Electronic Arts at price-to-sales ratios of 7.5 and 5.0, respectively.
To justify its premium, Roblox will need to show it can keep engagement rising even as it becomes more conservative with its spending. That type of result is a tall order in most environments, but it will be particularly tough in today's weak setting for consumer discretionary spending. As a result, investors might want to watch this stock from the sidelines until the next earnings report arrives, and there are more concrete signs that Roblox's recent progress is here to stay.
