2 Big Risks to Consider Before Buying Roblox Stock

After hitting its 52-week low of $25 in September, Roblox (NYSE: RBLX) stock has rallied more than 50%. The company's sales and bookings rose 26% and 23% in 2023. Investors were pleased since these figures suggest its headwinds may be over.

Roblox is a classic growth stock. After going public in March 2021, the video game firm virtually doubled its quarterly sales from $387 million to $750 million in 2023. Revenue growth has been double-digit and triple-digit except for the second half of 2022.

Two considerations make me wary of the company's brief history. First, given minimal data, Roblox's performance is hard to forecast. Second, the lack of historical data makes it tougher to evaluate the management team's resilience during business cycles and tough times.

It doesn't help that Roblox is still losing money despite its tremendous growth. High-growth companies like Amazon invest extensively in the short term to acquire market dominance, but Roblox's short history creates uncertainty for investors. Roblox's strong 2023 performance suggests its business model is viable. Bookings, revenue, daily active users, and engaged hours all increased by double-digit percentages year over year, showing its second-half 2022 dip was temporary.

Roblox added $458 million in operating cash flow, up 24% year over year. The loss-making corporation may ultimately turn around with better operating leverage and expansion. Roblox's recent performance suggests management can deliver growth and positive cash flow in the short term, but investors will need to see that performance sustained.

Another danger for new Roblox investors is the company's high valuation. The stock now has an 8.6 price-to-sales ratio. Although below its 5-year average of 15.9, this ratio is strong compared to other prominent technology businesses. Alphabet has a 5.6 price-to-sales ratio.

Roblox bulls may argue that the company's long-term goal of 1 billion daily active users -- it had 68 million in its latest quarter -- would create huge shareholder value. This is the thing. Roblox needs the metaverse become mainstream to fulfill its long-term goal. This is uncertain because the future of that young industry depends on technology advancement, regulatory support, hardware and software integration, etc. Competition is fierce, with companies like Meta Platform investing heavily in the metaverse.

Roblox's stock valuation may drop if company fails to meet growth plan targets or execute poorly. The former would increase investor portfolio volatility, while the latter would degrade capital.

Roblox's 2023 growth should allay investors' doubts regarding its business plan. Still, buying its shares today is risky. The risks of investing in a fledgling public firm must be accepted. The stock's high value gives investors little protection.

Conservative investors may want to keep the company on their watch lists, except for those ready to take these risks. They should act following conviction, a lower admission price, or both.

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