This Cathie Wood Favorite Just Beat on Q3 Earnings, But Should You Buy the Stock?

Cathie Wood is one of the market's best-known investors, and has earned a reputation for investing in “disruptive” and futuristic technologies through her ARK Invest family of funds. She has attracted a large following of investors who track her buys and sells, and has garnered headlines for her bold calls on names like Tesla (TSLA) and Block (SQ). 

Among her diverse portfolio, which runs the gamut from cryptocurrency to gene editing, online gaming company Roblox (RBLX) has been a longtime holding in Wood's flagship Ark Innovation ETF (ARKK). As the No. 4 holding in the fund, RBLX accounts for 6.77% of ARKK's weight, making it a substantial piece of Wood's benchmark ETF.

Roblox just spiked higher after strong earnings, raising the question - should investors follow Wood into this core ARKK portfolio holding? Here's a closer look.

Understanding Roblox Stock

With a market capitalization of approximately $32.1 billion, Roblox (RBLX) operates a global online gaming platform that enables users to imagine, create, and participate in immersive 3D experiences.The company has become a popular player in the gaming industry, fostering a community where millions of users connect and collaborate daily.

Roblox has concentrated on expanding its user base, enhancing monetization strategies, and deploying advanced technological infrastructure. A key driver of its success is the utilization of robust network effects. As more users join the platform and generate content, they draw in additional users, propelling a continuous cycle of growth.

RBLX shares have rallied 51% over the past 52 weeks and 16% on a year-to-date basis, turning in a more volatile performance compared to the broader S&P 500 Index($SPX). However, after spiking nearly 20% on Oct. 31 following its latest earnings report, RBLX has gapped well above resistance at the 50-day moving average, indicating a short-term bullish trend.

Roblox's Beat-and-Raise Q3 Pops the Stock

Shares of the gaming company gapped well above this closely watched trendline on Oct. 31 after smashing Wall Street's expectations in its Q3 earnings release. Roblox reported record revenue growth of 29%, hitting the $919 million mark for the first time ever. Booking figures, or adjusted revenue, soared to $1.13 billion, surpassing expectations of $1 billion and marking an impressive 34% increase from the year-ago quarter. The company added 18.7 million new daily users, reflecting 26% growth from last year's quarter, for 88.9 million daily active users during the quarter.

Roblox's quarterly loss of $239.3 million, or $0.37 per share, was slightly narrower than expected, and improved from last year's loss of $277.2 million.

On the liquidity side, Roblox generated operating cash flow of $247.4 million, up 120% annually, and free cash flow of $218 million, up 266%. Roblox closed the quarter with a cash balance of $4 billion. 

“Roblox’s exceptional Q3 results demonstrate the strength of our platform and the effectiveness of our growth strategies,” CEO David Baszucki stated.

Despite robust growth and user engagement, the company still isn't profitable, and noted that higher costs in Q3 relative to Q2 were driven by investments in artificial intelligence (AI), which "includes migrating more and more of our safety infrastructure to AI where possible and where responsible to do so." 

Amid rising AI spending, management is also focused on enhancing its monetization strategies. The company aims to harness its vast user base and creative content to boost revenue while also focusing on operational efficiency to reduce costs. If successful, these initiatives could pave the way for Roblox to become profitable in the future. Roblox is also targeting aggressive top-line growth of over 20% going forward.

Looking ahead, Roblox raised its 2024 booking guidance to between $4.34 billion and $4.37 billion, up from the previous projection of between $4.18 billion to $4.23 billion, and ahead of the $4.22 billion consensus. The company also guided for a narrower-than-forecast full-year loss of $1.01 billion, at the midpoint.

What Do Analysts Say About Roblox Stock?

Following the well-received quarterly report, the analyst community has weighed in bullishly on Roblox.

Morgan Stanley upgraded RBLX to “overweight,” with the brokerage firm writing, "Recent results leave us incrementally positive on RBLX's ability to consistently execute and gain share on the path to its long-term opportunity. We believe consensus underappreciates the potential for RBLX to exceed its 20% bookings growth targets as it continues expanding its audience."

Analysts at Stifel, Deutsche Bank, Citi, and more all reiterated “buy” opinions and raised their respective price targets on Roblox after earnings, while Barclays also raised its Roblox price target from $40 to $50, even as the firm kept an “equal weight” rating.

Overall, Wall Street has assigned RBLX stock a “moderate buy” rating. The mean price target now stands at $57.11, about 7.3% overhead.

For investors who have the patience and risk tolerance to ride out the volatility associated with investing in an unprofitable growth stock, the recent trends in cash generation and top-line growth at Roblox could make this a Cathie Wood stock worth considering a small stake in, especially with the shares still down 62% from their 2021 highs.

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On the date of publication, Nauman Khan did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.