Where Will Roblox Stock Be in 3 Years?

Roblox (RBLX 1.35%) has taken investors on a wild ride since it went public through a direct listing nearly three years ago. The gaming platform company's stock opened at $64.50 in March 2021, and more than doubled to its all-time high of $134.72 at the apex of the growth stock rally in November 2021, but now trades at about $40.

Roblox grew rapidly throughout the pandemic as its core audience of tween users stayed at home and spent more time on its platform. However, its growth cooled off as the pandemic ended and those players went back to school. Rising interest rates then drove more investors to scrutinize its persistent losses and lofty valuations.

Image source: Getty Images.

Roblox's growth has stabilized over the past year, but will it head higher and outperform the market over the next three years? Let's review its business model and long-term challenges to decide.

How Roblox carved out its own niche in the gaming market

Roblox's gaming platform enables its users to create their own video games with a simple block-based system that doesn't require any coding knowledge. Its creators can share their games with other players and monetize them to earn an in-game currency called Robux, which can be converted back to real-world currencies. Its players can recharge their Robux through individual purchases or its Roblox Premium subscription plan for cheaper Robux purchases, exclusive items, and other perks.

Roblox's creator-driven cycle makes it more similar to a content-sharing platform like Alphabet's YouTube instead of a traditional gaming company. It also built its own metaverse, which enabled its players to socialize across a broad range of virtual worlds. Companies like Nike, Kering's Gucci, and Sony Music have already set up their own worlds on Roblox to reach younger consumers. It ended 2023 with 68.4 million daily active users (DAUs).

But can Roblox keep growing over the next three years?

Roblox gauges its growth through its bookings, which reflect its underlying sales of Robux, its DAUs, its average bookings per DAU (ABPDAU), and its total hours engaged. It suffered a severe slowdown in 2022 as the pandemic ended, but it its growth in bookings, DAUs, and hours engaged rose significantly in 2023.

Data source: Roblox.

However, Roblox's recovery was mainly led by its overseas users, who generated lower bookings than its users in the U.S. and Canada, as well as older players and creators who bought less Robux than its tween users. That shift in its target audience, along with currency headwinds from a strong dollar, caused its ABPDAU growth to flatline in 2023.

Roblox could offset its lower ABPDAU by gaining more DAUs and locking them into its platform for longer sessions, but supporting a higher mix of lower-value DAUs could cause its "infrastructure, trust, and safety" expenses -- which rose 27% in 2023 and outpaced its bookings growth -- to continue rising and compressing its margins. Meanwhile, its "developer exchange fees" -- the revenue it pays back to creators as they swap their earned Robux back to real-world currencies -- also climbed 18% in 2023. Those two categories of operating expenses gobbled up 58% of its revenue for the full year.

As a result, Roblox's net loss widened from $492 million in 2021 to $924 million in 2022, then widened again to $1.15 billion in 2023. Analysts expect the company to remain unprofitable for at least the next three years, but it still has $3.2 billion in liquidity and its low debt-to-equity ratio of 0.3 could give it some room to raise fresh cash.

From 2023 to 2026, analysts expect its bookings to grow at a steady CAGR of 19%. Based on those expectations, it looks reasonably valued at six times this year's bookings -- but its inability to narrow its losses could drive away the bulls.

Where will Roblox's stock be in three years?

Assuming its price-to-sales ratio holds steady and it consistently beats analysts' expectations, Roblox's stock could climb about 40% over the next three years. But during that time, its core tween users could pivot toward other gaming platforms or higher-end game development engines like Unity Software as they grow older. Its growth in overseas and older users could also stall out, and its operating expenses could overwhelm its bookings and prevent it from ever breaking even.

Therefore, I believe Roblox's stock could gradually rise higher over the next three years, but it could underperform the market and many of its industry peers as it struggles to prove that its business model is sustainable. It's arguably a better idea to stick with other more promising growth plays until Roblox stabilizes its margins and losses.