It has been nerve-wracking for Roblox's (NYSE: RBLX) investors. The company came public during the pandemic, which was an excellent time for its business as users spent their time playing online games during the lockdown. The boom, however, turned into a bust lately as users went back to school and work.
Roblox's stock price went through a similar process. The company went public at around $45 and reached about $142 within months. The stock then corrected to a low of $22 before dropping to $42 this Friday.
Investors' attitude toward the company has been volatile, and the earnings in the second quarter of 2022 should explain why.
Roblox's latest numbers are disappointing.
Roblox has been delivering revenue growth in every single quarter since 2019 -- until recently. In the first quarter of 2022, revenue fell 6% sequentially while order bookings declined by 18%. Investors accustomed to a track record of sustained growth did not like what they saw.
But before investors get over their disappointment, they have to stomach another quarter of weak performance from Roblox. Bookings fell 4% year over year to $640 million -- though that's slightly better than the first quarter's bookings of $631 million. Though up 30% year over year, revenue growth decelerated materially from 127% last year.
Daily active users (DAU) for the second quarter of 2022 fell to 52.2 million after reaching a record high of 54.1 million in the first quarter of 2022. The declining DAU is particularly problematic as it raises the question of whether Roblox's user growth has peaked. The only silver lining is that DAU resumed its upward movement in June and July (more on this later).
In short, Roblox delivered another weak quarterly performance amid the reopening of global economies.
Fortunately, there are signs that Roblox might be growing again soon.
Investors have generally expected Roblox's performance to be challenging in 2022. Still, they are hopeful that this situation will be temporary and that the tech company will be back on its growth trajectory soon.
Fortunately, there are early signs that their hope will come true sooner than later.
In June 2022, Roblox reported that DAU, hours engaged, and bookings have all improved compared to May 2022. For example, DAU in June reached 53.3 million (DAU in May was 50.4 million), up 23% year over year. Hours engaged was 3.924 billion hours compared to 3.571 billion hours in May. Similarly, bookings in June grew 8% year over year to $217 million; bookings in May fell 9% to $199 million.
And if June's performance is not convincing enough, then July's performance will likely confirm the trajectory of this turnaround, with both DAU and hours engaged reaching new all-time highs. The former was up by 26% year over year, and the latter improved by 25%. Bookings also expanded by 8 to 10% compared to last year, confirming the trend seen earlier in June.
These operational metrics for June and July are leading indicators, suggesting that Roblox's third-quarter financial performance will likely revert upward. All the company needs to do is sustain its performance in July throughout the third quarter.
I think it will.
Still, investors should keep an eye on these potential red flags.
There are green shoots indicating that Roblox would be back in growth mode. Still, there are potential red flags that investors should keep an eye on -- Roblox's expanding net losses and decline in operating cash flow.
It is not unusual for growth companies like Roblox to report higher growth accompanied by higher net losses. This is because the tech company must invest in talent and infrastructure to grow its platform. Yet there is no guarantee that these investments will be value-adding over the long run -- higher revenue will be useless if it doesn't result in higher profits over time. As a result, investors need to watch how Roblox's bottom line evolves.
Similarly, a decline in operating cash flow (down from $191 million last year to $26 million this quarter) is not desirable since it reduces the cash flow available for Roblox to invest in its business. A higher net loss and a slower deferred revenue increase impacted operating cash flow. The latter should recover as Roblox's bookings grow again in the coming quarters.
In short, investors should keep an eye on any unexpected rise in net losses or a significant decline in operating cash flow in the coming quarters. A substantial change in either of these would be alarming.
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