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Trading Near Its 52-week High, Is Roblox Stock Still A Good Buy?
Roblox (NYSE: RBLX) has a lot of long-term potential as it scales and expands its operations. While its gaming platform mainly caters to younger audiences, it has been working on making its experiences appeal to a wider and older range of users, which can unlock even more growth opportunities. There's also massive potential for it to generate significant advertising revenue in the future, by giving marketers unique ways to reach their target markets.
The problem, however, is that Roblox isn't profitable yet and may not be anytime soon. And that means there is the risk of frequent share offerings in the future, resulting in dilution for existing shareholders.
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Investors haven't been all that concerned with the company's poor financials of late as Roblox stock has skyrocketed more than 66% in just the past 12 months, as it continues to hit new 52-week highs. Is the stock still a good buy right now, or could it be approaching a peak?
Roblox has been a growth machine
A big reason investors are bullish on Roblox's stock is that the company has been growing at a high rate. And while its growth rate did slow down in 2022 as it went up against some strong comparable numbers from the year before (it benefited significantly from people staying at home during the pandemic), it's still generating near-30% growth today.
RBLX Operating Revenue (Quarterly YoY Growth) data by YCharts
In the trailing 12 months, the company generated $3.4 billion in revenue. Back in 2020, its top line came in at just under $924 million. While the growth has been solid in recent years, the problem is on the bottom line, as Roblox doesn't appear to be on a path to profitability.
The company's earnings have been going in the wrong direction
The biggest problem with Roblox is that the business simply isn't anywhere near posting a profit. While it's not unusual for a growth-oriented company to take time to reach breakeven, the concern is that Roblox is not even heading in the right direction; its quarterly losses have been increasing. Although recent quarters have shown some improvement, the overall trajectory for the bottom line hasn't looked great.
RBLX Net Income (Quarterly) data by YCharts
And while the company has been generating positive operating cash flow, that's due to its heavy reliance on stock-based compensation. The business isn't in strong financial shape by any means, and that's a risk investors need to factor in when deciding whether to invest in Roblox.
Roblox has a lot of potential, but it also comes with significant risks
As much as I like Roblox's business and see its growing popularity, I wouldn't invest in it today because of its poor financial performance. If the business is scaling but its bottom line isn't showing improvement, that is a cause for concern as it raises doubts about whether its operations are truly sustainable in the long run.
And with loads of competition in the gaming world and entertainment options for kids and adults to choose from, it may need to be a lot leaner and more efficient to continue growing its operations at a high rate.
Roblox stock isn't suitable for risk-averse investors, and it may be approaching a peak. While there is good growth potential for the business in the long run, I would steer clear of the stock until the gaming company can show some meaningful progress with respect to profitability. The danger is that the higher its valuation gets, the more of a decline there can be in the future if its earnings don't show significant improvement.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roblox. The Motley Fool has a disclosure policy.
