Roblox Corp. (RBLX, Financial), an online platform that allows gamers to create, develop and monetize games for other players, has seen its shares tumble more than 40% over the last year. On Aug. 9, its second-quarter results sent shares down another 20%, almost erasing the gains it has made so far this year. With a closing price of $30.61 on Thursday, the stock has recorded year-to-date gains of nearly 8% and a loss of around 29% for the past month.
Following the earnings release, Morgan Stanley upgraded Roblox to equal weight from underweight with a price target of $30, an increase from $26 previously. Morgan Stanley considers the company's second-quarter results mixed, but argued that shares now fairly reflect the near-term headwinds from bookings deceleration.
The second upgrade came from Wedbush analyst Nick McKay, who upgraded the stock to outperform from neutral. He kept the price target at $37, which represents 20% upside potential from the closing price on Thursday.
McKay said the company "may have the most compelling growth trajectory among the video game names in our coverage universe."
With a disappointing earnings report that failed to meet expectations, I believe there are strong reasons to question these upgrades.
Highlights from the second-quarter 2023 financial results
For the three months ended June 30, Roblox posted a loss of 46 cents per share, which was worse than the loss of 45 cents analysts were anticipating. Bookings, which is the company's revenue that includes sales recognized during the quarter and deferred revenue, grew 22% from to prior-year quarter to $781 million, but fell short of expectations of $785 million.
Its revenue that does not include those items increased 15% year over year to $680.80 million.
Further, the number of average daily active users totaled 65.5 million, up 25%, while average monthly unique payers increased 19% to 13.5 million and hours engaged rose 24% to 14 billion.
These metrics look good, but they do not reveal the whole truth about Roblox's financial performance. Some negative factors have been overlooked, including average bookings per DAU that declined 3% year over year to $11.92. I suppose Morgan Stanly liked the 3% increase in average bookings per monthly unique payer to $19.32. However, I do not think it is enough to justify an upgrade.
Financials show net losses that will be hard to turn into profits
Roblox reported a net loss attributable to common stockholders of $282.8 million for the second quarter, which was wider than the net loss of $176.44 million for the same quarter a year ago. For the six months that ended June 30, the company recorded a net loss of $551.09 million, which was also wider than the net loss of $336.64 million in the prior-year period.
This shows the company is not only losing money, but is widening its net losses. The five-year trend for the net income is very disappointing, indicating that Roblox will have a tough time becoming profitable. The net income was -$88.08 million in 2018, -$70.97 million in 2019, -$253.25 million in 2020, -$491.65 million in 2021 and -$924.37 million in 2022.
Increasing operating expenses
Another issue is that Roblox has been increasing its operating expenses in order to support growth. It recorded $832.73 million in total expenses for the quarter, which is up from $618.32 million a year ago.
The company reported higher expenses in sales and marketing, research and development and developer exchange fees. This will not help it become profitable anytime soon. It is vital to reduce costs to report first an operating profit, and then a net profit. As such, I cannot agree with the analysts.
Concerns regarding growth trajectory
With regard to growth trajectory, I have my concerns as Roblox lost its momentum with revenue growth of only 15.94% in 2022. According to MarketWatch, it previously saw annual growth rates of 56.45% in 2019, 81.73% in 2020 and 107.73% in 2021.
Its quarterly growth rates dating back to June of 2022 did not show an impressive trend, but were better than the annual numbers.
Low profitability and a high debt-to-equity ratio
Roblox has a very low profitability rank of 1 out of 10 and a high debt-to-equity ratio of 6.21, which increases the riskiness of the business.
Further, I consider the three-year revenue growth rate of 57% not sufficient enough to support a positive outlook as the three-year Ebitda growth rate of -148.8% and three-year earnings per share without non-recurring items growth rate of -125.6% show there is a lot of negative growth in profitability. It is not just revenue that we should focus on, but how efficiently Roblox turns its sales into profits. The company clearly has trouble doing that since its net losses have widened over time.
Final thoughts
Roblox expects to continue to report losses for the foreseeable future, which is not a catalyst to build a positive outlook on. I understand the reasons for upgrading a stock differ from firm to firm, but given the poor financial results for the latest quarter, I would avoid the shares.
