Roblox is turning a corner, but can it complete a reversal?

Key Points

• Roblox had a strong Q4, highlighted by record bookings. 
• The company issued favorable guidance and a healthy long-term forecast. 
• The market is moving higher but may have trouble breaking out of its trading range. 

The Roblox NYSE: RBLX market has been rangebound for two years, but that situation is changing. The company leaned into optimizing its business, growing its base and building the platform for future growth, as shown in the Q4 results. The results reflect the impact of an expanding user base leveraged by higher bookings per user, suggesting cautiousness in the guidance. The company issued healthy guidance for the year and a robust outlook for the next three, pointing to increasing cash flow and eventually profitable operations. News that has the market on the move, share prices are heading higher within a trading range with the potential to break to new highs. 

Roblox quietly builds the metaverse, banks on an aging demographic

Roblox's target demographic has been a headwind to its growth because 6- to 12-year-olds don't have access to unlimited free cash flow. However, the demographic is aging, and Roblox's efforts to retain users with age-appropriate content are working. The company reported $749.9 million in net revenue for Q4, a gain of 30%, underpinned by record-setting bookings. Bookings topped $1.1 billion, crossing the $1 billion threshold for the first time, and are expected to remain solid in 2024.

Top-line strength is driven by a 22% increase in average daily users and an 18% increase in average monthly users. The user growth is compounded by a 6% and 3% increase in average bookings per user and hours of engagement, up 21%, suggesting bookings strength will persist.

The company continues to post net losses, but this is due to reinvestment in R&D and infrastructure to support growth at scale. The good news is the GAAP $0.52 in losses is better than expected and laid the foundation for the post-release rally, kicked into high gear by the guidance. 

The guidance is good. The company expected 2024 revenue to slow to a 6% pace above the Marketbeat.com analysts' forecast. Bookings are also expected to run above forecast and may exceed guidance given the Q4 strength. Regardless, bookings are expected to grow by 20% and are a leading indicator for the business, pointing to sustained growth expected to continue through 2027. 

The critical detail in the guidance is the expectation for margin expansion. The company forecasts an average 150 basis point improvement in margin each year because of increasing revenue leverage and decreased spending. 

Analysts support Roblox, but will they drive it to new highs? 

The analysts support Roblox, and their sentiment has firmed over the last year. The consensus sentiment increased to Moderate Buy from Hold in 2023, and the price target followed it, rising 30%. The caveat is that the consensus target assumes fair value near the middle of the trading range, aligning with current price action. The high price target is barely above the top of the range, and the analysts aren't rushing to raise their targets now. If that changes, Roblox will likely move up to the high end of the range and may move to a new three-year high. 

Roblox has headwinds; insiders are selling

Roblox is well-capitalized, so there is little fear of dilution, but the insiders pose a different threat. Insiders own 30% of the stock and have been selling it regularly. Sales have slacked off sequentially over the past few quarters but still present a headwind to the market. The headwind may strengthen if share prices return to the range's top. 

The chart favors higher share prices, with support evident at the mid-point of the range. However, resistance near the latest high may cap gains before the market can move higher. In this scenario, there is a risk of a bull trap forming within the range, including a break at the top of the range. Opportune entry points exist at the bottom of the range, on pullbacks within the range, and once the top of the range is broken and new support is confirmed. That may not happen until there is a clear line of sight to profits for this tech company.