After years of struggle, shares of Roblox (RBLX 18.33%) appear to be on the road to recovery. The stock is up nearly 90% from its May low as sequential revenue growth is again on the rise.
The question for Roblox is whether that increase can continue through 2025. Will its improving numbers translate into profits and further stock price growth, or is this merely a slight improvement as the struggle to come out of a bear market continues?
The state of Roblox
The company provides an online gaming platform. What makes it stand out from competitors is Roblox Studio, a free game-creation platform that fosters the development of 3D games and virtual worlds.
This description likely inspires thoughts about the metaverse, and indeed, the stock took a hit in the 2022 bear market, in part because the metaverse became a fad that passed relatively quickly.
Fortunately for Roblox investors, its gaming platform has maintained and increased its popularity, particularly as the company pivoted into artificial intelligence (AI). Such tools have improved the productivity of its creators and dramatically reduced the amount of technical skill needed to create games.
NYSE: RBLX
Key Data Points
Roblox also has a strong following among children, with around 39% of its daily active users (DAUs) 13 and younger. Though the over-13 cohort is now a larger and faster-growing group, the younger group remains an important part of its base.
The platform's DAUs have grown to 89 million in the third quarter of 2024, a yearly increase of 27%. Also, since hours spent on the platform surged 29% over the same time frame, the average user now spends more time on Roblox.
Roblox's financials
Not surprisingly, that rising popularity has boosted the top line. In the first nine months of 2024, revenue was $2.6 billion, 28% higher than in the same period in 2023. That represented improving growth since, in the first three quarters of 2023, revenue grew by 24% yearly.
Unfortunately for shareholders, costs exceeded $3.4 billion for the first three quarters of the year, largely because of $758 million in stock-based compensation. Hence, even when including other revenue sources, the company still lost $716 million in the first nine months of the year, only a slight improvement from the $828 million loss in the year-ago period.
Perhaps the most notable improvement in the financials came from its free cash flow (FCF). The company reported $521 million in FCF during the first three quarters of 2024, far above the $46 million during the same period in 2023. Since stock-based compensation is a noncash expense, the improved FCF shows Roblox to be in better financial shape than its net losses imply.
The company's 2024 guidance calls for 28% yearly revenue growth. Hence, at least in the immediate future, investors should expect more of the same.
Still, with the increase in the stock price, it has become more expensive on a relative basis, with a price-to-sales ratio (P/S) of 11. That does not compare to the 2021 bull market when the sales multiple sometimes exceeded 30, though it is higher than last spring when the P/S was around 7, which implies it is not as much of a bargain as it was recently.
Will Roblox soar in 2025?
Although anything can happen this year, investors should probably temper their expectations with the stock and treat it as a hold.
Roblox's DAUs continue to grow rapidly, and its strengthening free cash flow may reassure investors concerned about its losses.
However, the losses may still hurt the company's financials, and the high stock-based compensation could still put off many investors. So its prospects for the next year are uncertain.
Roblox stock should remain a major player in the gaming sphere, and shareholders should feel safe holding their current positions. Nonetheless, with the near-term direction of the stock in doubt, investors should probably consider putting new money to work elsewhere.
