If you invested $1,000 in video game platform company Roblox (RBLX -1.90%) in September 2024, then take a victory lap, because you have about $3,000 now. Roblox stock has been red-hot over the past year.
It's quite the comeback. In 2022, Roblox stock was down more than 80% from its previous highs. Then, from early 2022 through late 2024, the stock was essentially flat. Shareholders could be forgiven for giving up after years of futility. But anyone who sold before mid-2024 missed this big rally.
Sometimes a rally can't really be explained. But fortunately for investors, the rally for Roblox can. Less than two years ago, the company doubled down on its discovery algorithm, and it appears that it smashed the ball out of the park.
Roblox is putting up growth numbers that you have to see to believe. But the bigger question is whether this can keep the good times going for investors.
Image source: Roblox.
Roblox's growth engine at work
Those who don't engage directly with the Roblox platform may not realize that it's not just one video game. The company says that it has 6.7 million active experiences on its platform, as of the second quarter of 2025. With so many options, how is a user expected to find anything? That's where the discovery algorithm comes in.
Roblox highlighted its discovery algorithm at its 2023 investor day presentation. It was already finding traction before this, but there have been ongoing tweaks to improve it. In short, the company is trying to learn about its users and then recommend the experiences that each particular user is most likely to enjoy out of the 6.7 million that are available.
It's clearly working. In Q2, Roblox shared a statistic that any investor can understand when it comes to this topic. Only five of its experiences have at least 10 million daily active users -- only five out of 6.7 million. Four of these five launched within the past year.
The takeaway is simple: Developers created new experiences on Roblox's platform, and Roblox was quickly able to find a huge base of users for each, thanks to its discovery engine.
By quickly matching users with new experiences, the platform can attract new developers looking for a growth opportunity. Users are also more likely to be engaged with the platform because they've found experiences that they love. It's a great flywheel. This is a solid foundation for long-term growth for Roblox.
Should investors buy Roblox stock now?
In Q2, Roblox revenue jumped 21% year over year to almost $1.1 billion. While the growth rate is already good, investors may be able to expect even better growth from here. This is because its user base is growing much faster than revenue -- it was up by 41% to 112 million. Bookings -- which are strongly correlated with future revenue -- were up by 51%.
Roblox's management expects up to 25% revenue growth on a full-year basis in 2025. But with user trends and bookings accelerating at a much faster pace, I believe that investors can reasonably expect a future acceleration in revenue. And when it comes to winning investments, accelerating growth is one key thing to look for.
Roblox also generates positive free cash flow, which is a key profitability metric. In Q2, its free cash flow was up by 58% to nearly $177 million.
It's tempting to call Roblox stock a buy for these two reasons alone. The platform is finding its stride when it comes to growth, and its free cash flow is soaring, giving management more money to work with. These are good traits.
However, one of the bigger concerns for me is that Roblox currently has a market cap of more than $100 billion. This means that it trades at a huge premium to its current business results -- for perspective, it trades at nearly 100 times its free cash flow, which most investors find expensive.
To be sure, there are many examples of past companies that appeared expensive and yet still delivered strong long-term returns for investors. But since it's so big already, I wonder how much bigger a platform such as Roblox can become before reaching maturity.
In my view, Roblox would need to put up three to four more years of comparable growth to justify its current price tag, and would need a few more years of additional expansion to deliver returns on par with what it's delivered over the past year.
Given its growth and cash flow, I think Roblox could be a stock worth buying. But given its already huge size, I'd lean toward making it a smaller position in my own portfolio if I were to buy shares now.
