Roblox Corporation's (NYSE:RBLX) Price In Tune With Revenues

Roblox Corporation's (NYSE:RBLX) price-to-sales (or "P/S") ratio of 8.4x may look like a poor investment opportunity when you consider close to half the companies in the Entertainment industry in the United States have P/S ratios below 1.2x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Roblox

What Does Roblox's Recent Performance Look Like?

Recent times have been advantageous for Roblox as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Roblox will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Roblox would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 26%. The latest three year period has also seen an excellent 203% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 29% each year as estimated by the analysts watching the company. With the industry only predicted to deliver 9.9% each year, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Roblox's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Roblox's P/S?

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Roblox maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Entertainment industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You always need to take note of risks, for example - Roblox has 3 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on Roblox, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.