Roblox Stock Set for More Gains After Strong Earnings Report

Key Points

• After reporting double-digit growth across the board, shares of Roblox stock are now up by as much as 17% in a single day.
• Investors have more reasons to believe the company can continue delivering these sorts of results moving forward, making it a buy.
• Wall Street analysts and institutional buyers like the stock, and the results only give them more reasons to keep it.

Despite the S&P 500 falling by over 1.3% on the morning of Halloween, some stocks have reason to celebrate their strong price action to beat most – if not all – of other peers in the stock market. Today, it is Roblox Co. NYSE: RBLX that announced its latest quarterly earnings results, the reason why markets reacted by sending the stock to a new 52-week high.

After rallying by as much as 17% for the day, Roblox stock now has a record of up to 35.6% returns for the year. It now stands above the rest of the technology sector as measured through its outperformance of over 30% compared to the Technology Select Sector SPDR Fund NYSEARCA: XLK. The fundamentals reported in this stock today give investors another reason to stick with this name moving forward, as the momentum achieved recently is likely to continue.

Wall Street analysts believe this as well, as they had been raising the company’s price targets before the earnings results came out. This means they will probably have to go back to the drawing board to come up with an updated view that more closely reflects the company's valuation after today’s results show how much more value there could be had in this fast-growing name.

Roblox Stock Surges as Key Growth Drivers Fire on All Cylinders

For a stock to rally as much as Roblox did, markets need to see enough growth to outpace any preference for other names in the sector. Roblox delivered this to investors in its recent quarter, starting with a massive 29% growth in revenues over the past 12 months.

Of course, revenue would mean nothing if the Roblox user base wasn’t pushing hard as a tailwind for the company. Daily Active users grew to 88.9 million, or 27% over the year, giving revenue enough room to keep growing along with expectations for more.

The demographics in Roblox keep improving as well. Now, over 34% of users are over the age of 13, compared to only 26% for the last quarter. This means that there’s a larger user base in Roblox that is closer to being of working age and not so reliant on parent allowances to pay for their Roblox add-ons and in-game purchases.

All of Roblox's growth and improvement resulted in one of the main metrics investors look at when considering a business to buy: free cash flow (operating cash flow minus capital expenditures), which grew to an all-time high of $218 million, up by as much as 95.3% compared to last year’s $111.6 million.

Achieving and maintaining positive free cash flow is the foundation for other investor benefits like stock buybacks, and it also enables accelerated growth in a business. This new jump in free cash flow could pressure Wall Street analysts to reiterate their recent price targets on Roblox stock.

As of today, only those at Piper Sandler were bold enough to raise their price targets to $54 from a previous $48. This valuation would call for a rally of 5% from where the stock got to today. However, these valuations were set at the beginning of October 2024, well before the company released its recent bullish results.

It would be safe to assume, then, that analysts need to reiterate their ratings and valuations on Roblox stock to reflect the recent results. Otherwise, they risk falling behind on the reality of how much this company might be worth today. That is one reason investors should consider buying Roblox before all these analysts jump on it.

Roblox Stock Clears Accusations, Sets the Stage for Future Momentum

Over the past quarter, a bearish report from Hindenburg Research pointed out that Roblox's methods of recording revenue and user growth were fraudulent. However, one way to explain how Roblox did nothing wrong in its methodologies is to provide a breakdown of its financials, which can be found in this analysis here.

More than that, the bearish report suggested that the company's safety measures regarding its underage audience weren't robust enough to provide a safe environment for its users. While these accusations might be true for most of the online gaming and social media space, there is no evidence that Roblox specifically bypassed any safety protocols.

Knowing that these accusations had no grounds for sending the stock lower, it seems that the $40 a share level acted as a very strong support for the call for new buyers as well. Some of these buyers came from Robeco Institutional Asset Management, which boosted its holdings in Roblox stock up to $35.6 million today.

As a final check for market sentiment, investors can compare the company's valuation multiples against the rest of the software industry. Particularly a price-to-book (P/B) ratio, where Roblox calls for a massive 392.4x versus the software industry's average 5.2x valuation today.

Some would call it expensive; others understand that stocks that offer this type of growth potential will never trade at low enough multiples, as the market is forward-looking and likes to get ahead of the curb on these high-potential stocks.