It has been a volatile ride for Roblox's (NYSE: RBLX) investors over the past few years. Since going public in 2021, the stock has traded as high as $134.72 and as low as $24.88.
However, since touching the low in 2023, the stock has made a solid comeback to above $40 per share, suggesting that intelligent investors might have noticed something about the stock.
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Roblox has proven the skeptics wrong
The pandemic that began in 2020 was a boom for Roblox. Revenue grew at high-double-digit (and even triple-digit) growth rates, and investors were excited about the gaming company's prospects. Soon, however, the boom turned into a bust as businesses and other forms of entertainment reopened.
As a result, revenue growth fell to just 2% in the third quarter of 2022. The bears worried that Roblox's rapid expansion during the COVID-19 pandemic was a one-off and that the growth would taper off. Some even feared Roblox would give back all its gains during that period.
Fortunately, Roblox's 2023 full-year performance puts some of those concerns to rest. Revenue rose 26% to $2.8 billion due to a 23% booking increase. Operating cash flow also jumped 24% year over year to $458 million.
Roblox's strong financial performance resulted from a solid improvement in operating metrics. For instance, daily active users (DAUs) grew 22% to 68.4 million, and engaged hours improved by 22% to 60 billion. These numbers show that Roblox has no problem attracting new users while retaining existing ones.
Roblox expects its strong performance to continue into the coming quarters, with revenue, bookings, and margins growing in 2024. For instance, the company guided for revenue of $3.3 billion to $3.4 billion, a growth rate of at least 18% from 2023.
Investors can finally sigh with relief that Roblox's business model is sustainable. Besides, there are good reasons to expect an even better future for the company in the coming years.
Roblox's prospects from here look bright
Roblox is an excellent example of a growth stock. In the last three years, it has more than doubled its quarterly revenue from $310 million in the fourth quarter of 2020 to $750 million in the fourth quarter of 2023.
While there was a temporary slowdown in growth in 2022, Roblox's latest performance suggests it is finally back in growth mode. The bedrock of Roblox's growth thesis is to achieve its long-term target of reaching over 1 billion daily active users -- that figure was less than 70 million in 2023.
To help it achieve this long-term goal, Roblox is investing heavily in its developers. The idea is to nurture high-quality developers so that they can continue to build high-quality content on Roblox's platform. High-quality content, in turn, will help retain old users and attract new users to Roblox's platform. A growing user base will further incentivize developers (thanks to higher income) to build even more games. The result is a virtuous cycle of ever-growing content and user base.
What's more, Roblox is investing in developing markets beyond its core markets in the U.S. and Europe to help it reach its long-term goal. This strategy has shown early results since DAUs in Asia Pacific and the rest of the world grew much faster than the U.S., Canada, and Europe in 2023.
As Roblox's user base grows, the company benefits directly from the growing commission fees -- it generates the bulk of its revenue by cutting user spending on its platform. It can also add new income streams, such as subscriptions, advertising, e-commerce, and more.
In the long term, Roblox should be well-positioned to benefit from the rise of the metaverse. While it will take years to mainstream the metaverse industry, investors should not ignore its potential. After all, J.P.Morgan estimates the industry could generate $1 trillion in annual revenue.
What does it mean for investors?
Roblox reached a massive milestone in 2023 after proving its business model is sustainable beyond the COVID-19 pandemic boost. Besides, there is clear evidence to suggest that Roblox could continue to grow in the coming years. With so much going on for the company in the coming years, investors should keep it on their radar.
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Lawrence Nga 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.
