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Better Buy: Zoom vs. Roblox Stock

Motley Fool - Fri Sep 8, 5:30AM CDT

Both Zoom Video Communications(NASDAQ: ZM) and Roblox(NYSE: RBLX) stock fell from Wall Street's good graces since their pandemic-related surges. There are different reasons for these weak performances in 2023, though. Zoom remains profitable but is expanding sales slowly, while Roblox is growing quickly but generating losses.

The good news is that both businesses have attractive growth avenues to target over the next few years. Their stock valuations have come down significantly since the start of 2023 as well. These factors could lay the groundwork for market-thumping returns ahead for shareholders, but which is the better buy? Let's dive right in.

Growth rates

Growth-focused investors will find more to like about Roblox's operating trends. The digital entertainment specialist posted a 22% increase in bookings, a measure of sales gains, in the most recent quarter. That surge marked a modest deceleration compared to the prior quarter, but Roblox is still expected to grow at a nearly 20% rate in 2023.

Zoom, on the other hand, last posted just a 5% revenue uptick and is targeting an even smaller increase for the full 2023 year. The video communications specialist is seeing shrinking demand for its online meetings service, yet growth rates are much stronger in the enterprise division. That's a big market that could deliver many years of gains to come -- but only assuming that the company can establish itself as a leader in the niche even among larger rivals such as Microsoft.

Financial successes

While Roblox is growing more quickly, Zoom is the clear winner on finances. Yes, profitability has declined since its pandemic peak. But Zoom is still generating substantial profits from its software-as-a-service platform. Cash flow is much stronger, too, at over $300 million of operating cash in the most recent quarter compared to Roblox's $28 million haul.

And Zoom is sitting on $6 billion in cash as of late July, giving management plenty of flexibility and resources to use as executives map out the company's next phases of growth, including a big push into generative artificial intelligence (AI).

Roblox isn't nearly as flush with cash and has warned investors to expect continuing net losses as management prioritizes growth initiatives, including AI, aimed at attracting more creators and users to the entertainment platform. Both companies can fund their own expansion strategies today, but Zoom alone has proven it can do so while generating sustainable profits.

The better buy

Investors might still prefer Roblox stock over Zoom's today. Profit margins will be free to rise over time as its active user base grows beyond its current level of 65 million daily users, after all. Zoom has bigger challenges in that it first must find a way to accelerate its sales trajectory for both the enterprise and online divisions. That's a tall order considering all the deep-pocketed companies targeting the digital transformation niche right now.

Roblox shares also seem reasonably priced at 7 times annual sales, down from recent highs of closer to 12 times sales. That valuation drop would make sense if bookings trends decelerate further over the next few quarters and if losses continue expanding.

Its robust engagement trends suggest a stronger market position, however, which will likely support an expanding user base and rising earnings over the next several years. If you're a growth-focused investor picking between these two formerly high-flying stocks, then Roblox will stand out as the better addition to your portfolio today.

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Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft, Roblox, and Zoom Video Communications. The Motley Fool has a disclosure policy.

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