Roblox Is Set for Better Times in 2024 and Beyond. Here's Why | The Motley Fool (2024)

Shareholders in Roblox (RBLX -0.96%) have been on a roller-coaster ride over the last few years. The company went public in 2021 as the COVID-19 pandemic was driving the use of its video game platform sky-high, and its stock price almost doubled from $70 to $135 in just a few months.

But investors' optimism about it faltered in the following few quarters, and its stock price slid below $25 per share. Concerns about the sustainability of its growth and its lack of profitability were some of the main drivers of the stock's poor performance.

Now, however, there are signs that Roblox has been through the worst and is well-positioned for better times in the future.

Validating the sustainability of its business model

The early phases of the pandemic created conditions that were ideal for a gaming platform like Roblox to thrive. Its revenue grew at high double-digit (and even triple-digit) percentage rates thanks to rapid user and bookings growth. Two years later, however, that boom turned into a bust as many of its users returned to school, workplaces, and group leisure activities outside their homes.

Unsurprisingly, investors' view of the company took a 180-degree turn from optimism to pessimism, and the bears started raising concerns about Roblox's business model. Could it still grow without the pandemic boom? Could it become profitable? Would the metaverse prove a passing fad?

The bears' fears were not unreasonable, especially as Roblox's revenue growth almost ground to a halt in the third and fourth quarters of 2022 at just 2%. Bookings fell in the first and second quarters of 2022. Similarly, its adjusted earnings before interest tax depreciation and amortization (EBITDA) fell by more than half in 2022 as limited revenue growth ran up against a higher cost structure.

Fortunately, things started to improve for Roblox in 2023. Bookings grew by 23% to $3.5 billion, revenue jumped 26% to $2.8 billion, and operating cash flow rose by 24% to $458 million. While Roblox remained in the red that year, it generated plenty of cash from its operations to invest in growth.

Operational metrics came in strong as well. The number of daily active users (DAUs) rose 22% to 68.4 million, hours engaged improved 22% to 60 billion hours, and average monthly paying users grew 17% to 14.5 million.

In other words, the disappointing performance in 2022 was a blip that reflected external conditions rather than the result of structural issues with the business. Investors' fears about the sustainability of Roblox's business model were somewhat assuaged.

A journey to 1 billion users

Now that Roblox has proven the viability of its business model, investors might wonder what's next for the company. Founder and CEO David Baszucki seems to have an answer: 1 billion daily active users.

To put that goal in perspective, Roblox had around 78 million daily active users as of the end of the first quarter. To come anywhere remotely close to that target would result in a business at least 10 times larger than it is at present. Extrapolating along that line would mean revenue should also be at least 10 times greater, and the gaming company could be hugely profitable.

Still, reaching 1 billion users would be a challenge. Roblox will need to continue growing its presence beyond its current user cohort, attracting people who are less gaming-oriented and who live in regions beyond its core North American and European markets. So far, the company has proven reasonably good at doing so.

For example, its Asia Pacific and "rest of the world" segments grew at much higher rates (26% and 19%, respectively) than its core markets (13%) in the first quarter. Similarly, the user cohort of 13 years old and above grew at 22%, outpacing the growth in its core under-13 user base.

Another key factor that will likely loom large for Roblox's future is what becomes of the metaverse trend. Today, metaverse technologies have a relatively small core user group that is mainly centered around the video gaming community. If the adoption of this technology expands widely beyond that and it's applied to new use cases in areas like education, services, and the industrial sector, we can expect Roblox to be a beneficiary.

While it is still unclear how the future will unfold for either the metaverse or Roblox, we can be confident that so long as the company is attracting new users, retaining them, and converting them into paying users, it will be well positioned to build a bigger and more robust business over time.

What it means for investors?

Roblox reached a significant milestone after proving the sustainability of its business model. While there are plenty of uncertainties around the company -- it is still unprofitable, and its path to that long-term goal of reaching a billion users is unclear -- the gaming platform company is much better positioned today than it was two years ago.

And if the metaverse trend picks up (never say never), Roblox could be a long-term winner.