Roblox (RBLX 1.35%) investors had a volatile 2023, with share prices rising and falling by over 30% on several occasions. The digital entertainment platform provider ended the year on an upbeat note, though, logging 61% annual gains compared to a 24% rally in the wider market.
The flip side of this volatility is that Roblox stock can sometimes be available at an attractive discount. That could be the case today given the stock's 15% drop since the start of 2024. Let's look at some reasons to like Roblox shares after their recent decline.
Roblox is seeing accelerating growth
Growth momentum has been stellar lately. After decelerating for over a year following the pandemic-related demand spike, sales trends stabilized in late 2023 and are now rebounding. Revenue jumped 38% year over year in the most recent quarter compared to a 15% year-over-year uptick in the prior quarter. Most Wall Street pros expect sales to increase by a healthy 20% in fiscal 2024.
Looking beyond those headline figures confirms that Roblox is having no trouble attracting users to its platform. The audience base expanded to 70 million daily users last quarter, up 20% year over year. Those users spent a collective 16 billion hours on the service, which was also up 20% compared to the prior year.
Gains were balanced across all age groups and in all of Roblox's selling markets. "We delivered another strong quarter of growth while executing against our financial plan," CFO Michael Guthrie told investors in early November following the Q3 earnings release.
Roblox is taking steps toward profitability
Roblox is still generating significant losses, which is a big knock against the stock. In fact, net losses ballooned to over $800 million through the first three quarters of 2023, up from a $640 million loss a year earlier. Management warned investors to expect continued red ink for the foreseeable future because the company is prioritizing growth investments right now.
RBLX Cash from Operations (TTM) data by YCharts
Yet the financial picture isn't as bleak as these factors might suggest. Roblox's cash flow turned solidly positive in recent quarters thanks to a combination of sales growth and reduced spending on capital projects like data centers. "We are now entering a new phase where we can slow the growth in operating expenses and capital expenditures, thereby generating operating leverage and cash flow," Guthrie said. That's great news for investors who are worried about where profitability might eventually land for this stock.
Looking ahead
Roblox is likely to report more progress in its growth rebound when Q4 earnings results are released on Wednesday morning. Investors are hoping to learn that the company's finances remain strong, even as engagement continues rising at about a 20% rate. The good news is that shares don't seem expensive right now at the current price-to-sales ratio of 9. Investors were paying nearly 11 times sales back in late 2023, after all.
It's true that this valuation still reflects plenty of optimism around Roblox's growth potential. Management sees room for much more than 100 million global users being connected with an expanding pool of digital creators making highly engaging virtual experiences. Yet even small steps in that direction, combined with further improving cash flow trends, should support strong returns for investors willing to hold the growth stock through the volatility ahead.
