Where Do You See Roblox Shares in Three Years?

Since its direct listing over three years ago, Roblox (NYSE: RBLX) has wowed investors. In March 2021, the gaming platform company's shares opened at $64.50 and more than doubled to $134.72 at the peak of the growth stock boom in November 2021. It now trades at $40.

The pandemic kept Roblox's core demographic of tweens at home and on the site, growing significantly. As the pandemic ended and players returned to school, its growth slowed. Rising interest rates made investors question its high valuations and recurring losses. Roblox's growth has steadied over the past year, but can it outperform the market in three years? Review its business model and long-term issues to decide.

Roblox's block-based technology lets players create games without coding. Share your games with other players and monetize them to earn Robux, which can be exchanged for real money. Players can recharge Robux individually or via Roblox Premium for cheaper purchases, unique products, and other benefits.

Roblox is more like YouTube than a traditional gaming firm due to its creator-driven loop. It established its own metaverse to let gamers socialize across many virtual worlds. Nike, Kering's Gucci, and Sony Music have Roblox environments to attract teens. Daily active users reached 68.4 million in 2023.

Bookings, which indicate Robux revenues, DAUs, ABCDAU, and total hours engaged, measure Roblox's growth. As the epidemic ended in 2022, bookings, DAUs, and hours engaged slowed, but in 2023 they grew dramatically.

However, overseas users, who booked less Roblox than U.S. and Canadian users, and older players and producers, who bought less Roblox than tween users, drove Roblox's rebound. ABPDAU growth flatlined in 2023 due to the audience shift and currency challenges from a strong dollar.

Roblox could increase DAUs and lock them in for longer sessions to offset its lower ABPDAU, but supporting a higher mix of lower-value DAUs could increase its "infrastructure, trust, and safety" expenses, which rose 27% in 2023 and outpaced bookings growth, and compress its margins. In 2023, its "developer exchange fees"—the money it pays creators to convert Robux to real money—rose 18%. These two operating expenses accounted for 58% of its annual revenue.

Thus, Roblox's net loss rose from $492 million in 2021 to $924 million in 2022 and $1.15 billion in 2023. Analysts predict the company to stay unprofitable for at least three years, but its $3.2 billion in liquidity and 0.3 debt-to-equity ratio may allow it to obtain new funds. Analysts predict a 19% CAGR in bookings from 2023 to 2026. At six times this year's bookings, it seems decently valued, but its failure to cut losses may deter bulls.

Roblox's stock might rise 40% in three years if its price-to-sales ratio stays stable and it surpasses analysts' forecasts. However, its core tween users may switch to other platforms or higher-end game production tools like Unity Software as they get older. Its international and elder user growth could slow, and its operating expenses could exceed bookings and prevent it from breaking even.

Thus, Roblox's stock could improve over the next three years, but it may underperform the market and many of its sector peers as it tries to prove its business model is sustainable. Until Roblox stabilizes margins and losses, other growth plays may be better.

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