Roblox (RBLX 3.83%) shares had been rallying ahead of its much-anticipated earnings update in mid-May, and the company didn't disappoint. Revenue growth was strong, and cash-flow trends impressed, even as the digital-entertainment specialist continued to book net losses.
Most Wall Street headlines focused on Roblox's accelerating growth rate that has pushed sales gains up to over 20% today from a negative result a few quarters back. But the bigger green flag is cash flow, which is pointing to potentially strong earnings growth ahead.
Let's dive right in.
Faster growth
There's no denying that Roblox is enjoying faster growth these days. Engagement levels are rebounding following a pandemic-related slowdown, with bookings expanding 25% in the first quarter after adjusting for currency exchange-rate shifts. Roblox was reporting negative bookings just five quarters back but has been steadily improving on this core metric thanks to strong demand among gamers and content creators.
RBLX Operating Revenue (Quarterly YoY Growth) data by YCharts
Sales expansion at this rate makes it much easier to boost profit margins, which helps explain why management is predicting steady improvements on this score in the years ahead. "We can now moderate our rate of investment in headcount and infrastructure," CFO Michael Guthrie said in a press release, "thereby generating operating leverage." Those comments were music to Wall Street's ears and helped push the stock well above the market's return so far in 2023.
The big green flag
Net losses are still uncomfortably large despite management's positive comments around financial trends. Roblox booked $270 million of losses in Q1 compared to a loss of $160 million a year ago. The company booked a $900 million operating loss last year following a $500 million loss in 2021.
Yet cash-flow trends paint a brighter picture of the business.
Operating cash flow was solidly positive at $173 million, and free cash flow passed $100 million. These metrics are leading indicators of positive earnings thanks to Roblox's service-oriented business that books deferred revenue over time.
Roblox is sitting on over $3 billion of cash right now, making it much less exposed to rising interest rates. That cash level has held steady despite aggressive spending on the platform over the last year or so. "We're in an awesome cash position," CEO Dave Baszucki said in a recent conference call with investors.
Looking ahead
The timing of Roblox's move into profitability is still uncertain. There are many risks that could push that improvement well into the future, too, including a recession developing that reduces consumer spending. Another major risk for investors is overpaying for this business. Roblox is priced at over 10 times annual sales, which is a large premium for a business that's been generating net losses in recent years.
But cash-flow trends suggest that these losses might soon give way to strong annual earnings. As a result, growth stock investors might want to keep Roblox on their watchlists, maintaining a close eye on its improving profitability through 2023 and into 2024.
