I’ve been looking around for shares to buy for my Stocks and Shares ISA next month. One that has piqued my interest is Roblox (NYSE: RBLX), especially as I’ve been spending time in its virtual worlds with my daughter.
Plus, I’ll no doubt be spending money in there soon, as she keeps asking for Robux (the firm’s virtual currency that allows players to buy in-game items and premium features).
My thinking here is that if I’m going to be forking out for Robux (along with millions of other parents), then I might as well own a small part of the company. That way, at least I can benefit in its success, assuming the stock does well.
Things I like
For those unfamiliar, Roblox is an immersive gaming platform loved by millions (mainly children). The firm doesn’t create the virtual worlds, but instead gives developers the tools to make their own. It then takes a 30% cut of each Robux spent on the platform.
In that respect, it’s a bit like YouTube, where users generate content. I do like asset-light platforms like this because they can be wildly profitable at scale (as Alphabet-owned YouTube is today).
Currently, Roblox doesn’t break out advertising revenue, but it already has shopping ads and virtual billboards. Many new movie releases are now being advertised on the platform. However, while advertising has immense long-term potential, it must be rolled out thoughtfully so as not to ruin the user experience.
Roblox has done a great job of growing its user base following the pandemic-fuelled gaming boom. In Q4 2022, it had 58.8m daily active users (DAUs). By Q4 2024, that had grown to 85.3m, representing 19% year-on-year growth and 45% more than two years earlier.
Somewhat confusingly, bookings (not revenue) tend to give a better picture of the money being spent on the platform. This metric, which is essentially a form of deferred revenue, has risen from $2.9bn to $4.4bn in two years.
The firm isn’t posting positive bottom-line numbers yet, but it does expect to generate between $800m and $860m in free cash flow this year.
Things that worry me
Over the long term, Roblox aims to have 1bn DAUs. Yet the vast majority of users are still children (over 32m are under 13 years old), and I don’t see that changing dramatically any time soon.
On a serious note, it worries me that Roblox has previously faced child grooming incidents on its platform. Despite investing heavily in safety measures, the risk sadly remains ever-present. It was partly why Turkey banned Roblox last year.
Another thing to note is that Roblox issues a massive amount of stock-based compensation ($1bn last year). While it’s not a cash expense, it still dilutes shareholders and remains a real cost.
Finally, the DAU figure in Q4 — the Christmas quarter — was down 4% from Q3. Is this a trend? Only time will tell, but it’s an amber flag for me.
My decision
Weighing things up, I’m still on the fence. So what I’m going to do is follow Roblox’s next couple of quarters to see if they impress me.
Who knows, I may yet be a shareholder by the time Christmas comes around and I’m putting Robux gift cards under the tree!
This post was originally published on Motley Fool
