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Roblox Stock: Buy, Sell, or Hold?

Motley Fool - Fri Feb 16, 6:45AM CST

The metaverse continues to intrigue many investors. And while giant tech companies like Meta Platforms stock can provide some exposure, a more magnified and perhaps purer play can be found in immersive gaming maker Roblox(NYSE: RBLX).

Admittedly, this smaller player is probably too speculative and volatile for conservative investors, and Roblox has a financial issue that some might be unwilling to overlook. In other words, whether Roblox stock is a buy, sell, or hold depends just as much on your risk tolerance as it does on the company's fundamentals.

But if you're not deterred by that preamble, let's forge ahead with a deep dive into Roblox's mostly good, sometimes bad, and occasionally ugly financial facts.

Checking some important boxes

When poring over Roblox's quarterly press releases, readers shouldn't exclusively look at the usual top- and bottom-line stats. Sure, those are important, but there are company-specific (or at least niche-market-specific) metrics that are also worth watching.

For example, you won't hear terms like "bookings" (which refers to Roblox's virtual-currency sales) in most companies' quarterly reports. As for Roblox, the company's fourth-quarter bookings grew 25% year over year to $1.13 billion; this also represents substantial growth over Roblox's third-quarter 2023 bookings of $839.5 million.

Other metrics to watch pertain to Roblox's user engagement. Specifically, the company's Q4 2023 hours engaged jumped 21% year over year to 15.5 billion. Moreover, Roblox's average monthly unique payers increased 18% to 15.9 million.

So far, so good, though investors should also want to get the skinny on Roblox's sales and margins. As it turns out, there's growth in those areas as well. In 2023's fourth quarter, Roblox's revenue surged 30% to $749.9 million, and this also demonstrates growth over the prior quarter's revenue of $713.2 million.

As for Roblox's margins, CFO Mike Guthrie spoke directly to the analyst community during the company's quarterly conference call, saying:

[Analysts'] margin expectations for Q4 were at about 18%. We generated about 23%. And for us, that compares to 20.3% last year. So it was about a 270 basis point increase in the fourth quarter.

Hence, Roblox seems to check the margins growth box as well.

An upgrade and an objection

With all of the aforementioned facts undoubtedly in mind, Goldman Sachs upgraded Roblox from sell to neutral -- not the most ringing endorsement ever, but the firm's price target increase from $35 to $48 does suggest a measure of confidence. For what it's worth, Goldman also praised Roblox as a "well-positioned company in the gaming/interactive entertainment space as well as an emerging thematic player around the metaverse and creator economy themes."

Maybe those analysts don't see Roblox as sufficiently "well-positioned" to actually recommend buying the stock, but that's neither here nor there. More to the point is Roblox's gaping financial hole that might be a deal breaker for some risk-averse investors.

Despite Roblox's impressive growth across multiple metrics, the company's net loss attributable to common stockholders still widened from just under $290 million in the year-earlier quarter to about $324 million in Q4 2023. On a full-year basis, the company's net loss deepened from $924 million in 2022 to about $1.2 billion in 2023. It would have been reassuring to hear Guthrie or Roblox CEO Dave Baszucki lay out a detailed cost-containment plan during the conference call, but that didn't materialize.

The foregoing, unfortunately, doesn't add clarity for prospective investors. Since Roblox has no net earnings and therefore no P/E ratio, it's challenging to determine whether the company is overvalued, undervalued, or neither on that basis. Plus, Roblox's impressive performance in some metrics weighed against the company's widening net loss makes it even tougher to confidently call Roblox stock a buy, sell, or hold.

And so I'll return to my original assessment of Roblox stock as a purer, more magnified play on the metaverse -- but also one that is more volatile and speculative. For the risk-averse who don't own the stock, it is best avoided; for current shareholders, it's a hold as long as your position size is modest; and for metaverse mavens, feel free to buy Roblox stock if you can tolerate the company's less-than-ideal bottom-line stats.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. David Moadel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group, Meta Platforms, and Roblox. The Motley Fool has a disclosure policy.

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