Roblox Stock Soars 22% After Q3 Earnings – A Turning Point Ahead?

Key Points

• Roblox Corporation's shares surged 22.07% last week following better-than-expected Q3 results, lifting the stock above a multi-year consolidation.
• The company reported improved financials, including $919 million in revenue and a 266% increase in free cash flow year-over-year.
• Roblox outlined new child safety measures, further improving market sentiment and attracting analyst upgrades.

Shares of Roblox Corporation NYSE: RBLX soared 22.07% last week after the company released its third-quarter earnings report, which exceeded expectations and marked a pivotal moment for the company. The earnings report boosted the stock, pushing it above a multi-year consolidation and into positive territory. It’s now up 12.4% year-to-date, nearly matching the computer and technology sector’s performance. The report and comments from the company also provided relief after recent negative sentiment spurred by a short report from Hindenburg Research that highlighted safety concerns on the Roblox platform.

Could this be a significant turning point for Roblox as the company demonstrates better-than-expected financials, addresses safety concerns, and shows signs of long-term growth potential? Let’s break down the details.

RBLX Surges Following Q3 Earnings Surprise

Roblox released its Q3 2024 results on October 31, sending shares soaring by over 22% last week. The company reported an earnings per share (EPS) of -$0.37, beating the consensus estimate of -$0.38 by one cent. Revenue for the quarter came in at $919 million, a 9.5% increase year-over-year (YoY), while bookings surpassed expectations at $1.13 billion compared to analysts' predictions of $1.03 billion. This narrowed quarterly loss marked a shift towards better profitability, with free cash flow surging 266% year-over-year to $218 million. This strong performance also came with an optimistic Q4 bookings outlook, with its midpoint projections at $1.35 billion versus the $1.34 billion analyst consensus.

One of the critical drivers for the bookings boost was the company’s expansion onto PlayStation this year, which added to its overall growth. Even discounting new console contributions, bookings still rose by an impressive 28%. Daily active users saw a 27% YoY increase, while engagement hours grew by 29%, exceeding expectations and showcasing robust platform growth.

Roblox Responds to Safety Concerns

The positive earnings report arrived shortly after Roblox faced criticism from Hindenburg Research, which alleged incidents of child endangerment on its platform. Addressing these concerns, Roblox released a letter to shareholders emphasizing the company's commitment to user safety.

The company stated that its "highest priority is to create one of the safest online environments for users, a goal not only core to our founding values but critical to our ability to meet our long-term growth vision.” The letter also highlighted that its policies, strict by design, cater to users aged five and up.

Roblox also outlined new safety measures that are set to be implemented in November. These include stricter content access controls for younger users, requiring parental permission for those under 13 to use certain chat features, and users under 9 needing parental consent to access “moderate” content. Additionally, a content labeling system will determine age-appropriate experiences. A new parent account feature will allow parents to monitor their child’s screen time and friends and update control settings.

Sentiment Improves, Stock Breaks Out

The solid Q3 earnings and proactive safety measures have contributed to a positive shift in market sentiment. This improvement helped propel the stock to break out above a multi-year resistance level near $50. The area had served as a significant barrier for the stock, but with last week’s close above it, previous resistance could now become newfound support. If Roblox maintains this positioning, it could mark the beginning of a significant momentum shift and potential turnaround.

The sentiment among analysts has also turned more favorable following the earnings beat. The stock currently holds a consensus Moderate Buy rating, with 14 out of 22 analyst ratings being Buys. Despite last week's sharp rally, the consensus price target of $52.55 suggests additional room for upside. Notably, Goldman Sachs raised its price target from $45 to $55, signaling a potential 7% gain, while Wells Fargo lifted its target from $54 to $58, projecting a nearly 13% upside.