Roblox is turning a corner, but can it complete a turnaround?

photo of the Roblox logo displayed on a smartphone resting on a keyboard

Key points

  • Roblox had a strong fourth quarter, highlighted by record bookings.
  • The company issued favorable guidance and a healthy long-term outlook.
  • The market is moving higher but may have difficulty breaking out of its trading range.
  • 5 stocks we prefer to Roblox

THE Roblox New York Stock Exchange: RBLX The market has been limited for two years, but the situation is changing. The company is committed to optimizing its business, expanding its base and building the platform for future growth, as shown in its fourth quarter results. The results reflect the impact of an expanding user base driven by higher bookings per user, suggesting caution in guidance. The company issued positive guidance for the year and robust outlook for the next three, pointing to increased cash flow and possibly profitable operations. News that has set the market moving, stock prices are heading higher within a trading range with the potential to reach new highs.

Roblox quietly builds the metaverse, targeting an aging population

Roblox’s target demographic has been a hindrance to its growth because children ages 6 to 12 don’t have access to unlimited free cash flow. However, the demographic is aging, and Roblox’s efforts to retain users with age-appropriate content are working. The company reported net revenue of $749.9 million in the fourth quarter, a 30% gain, buoyed by record bookings. Bookings topped $1.1 billion, crossing the $1 billion mark for the first time, and are expected to remain strong into 2024.

Revenue strength is driven by a 22% increase in average daily users and an 18% increase in average monthly users. Adding to the user growth was a 6% and 3% increase in average bookings per user and engagement hours, up 21%, suggesting booking strength will persist.

The company continues to post net losses, but this is due to reinvestment in research and development and infrastructure to support large-scale growth. The good news is that GAAP losses of $0.52 are better than expected and set the stage for the post-release rally, driven full force by guidance.

The guide is good. The company expected 2024 revenue to slow at a pace 6% faster than analysts at expected. Bookings are also expected to exceed forecasts and may exceed guidance given the strength of the fourth quarter. Regardless, bookings are expected to grow by 20% and are an important indicator for the business, indicating sustained growth that is expected to continue through 2027.

The critical detail in the guidance is the expectation of margin expansion. The company expects an average margin improvement of 150 basis points each year due to increased leverage and decreased spending.

Analysts Support Roblox, But Will They Take It to New Highs?

Analysts support Roblox and their sentiment has strengthened over the past year. Consensus sentiment increased to Moderate Buy from Hold in 2023, and the price target followed suit, rising 30%. The caveat is that the consensus target assumes a fair value near the middle of the trading range, aligning with current price action. The high price target is just above the upper limit of the range, and analysts are in no rush to raise their targets now. If that changes, Roblox will likely reach the high end of the range and could reach a new three-year high.

Roblox has headwinds; insiders are selling

Roblox is well capitalized, so there is little fear of dilution, but insiders pose a different threat. Insiders own 30% of the shares and sell them regularly. Sales have slowed sequentially in recent quarters, but are still a headwind for the market. The headwind could strengthen if stock prices return to range highs.

The chart favors higher stock prices, with support evident at the midpoint of the range. However, resistance near the last high could limit gains before the market can move higher. In this scenario, there is a risk of a bullish trap forming within the range, including a breakout at the top of the range. There are convenient entry points at the bottom of the range, during pullbacks within the range, and once the top of the range is broken above and new support is confirmed. That may not happen until there is a clear profit vision for this tech company.

RBLX stock chart

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