Roblox (RBLX -2.27%) is set to report its first-quarter earnings after the market close on Monday, May 10. This will be the online platform's first earnings report since going public in March.

Investors will be closely watching how well Roblox is monetizing its users, since much of the content on the platform is free. One of the metrics management uses to evaluate the company's performance is average bookings per daily active user. The further Roblox can grow this number, the more valuable its platform becomes in the long run.

Heading into earnings, here's what you need to know about Roblox's progress toward monetizing its user base.

Roblox logo

Image source: Roblox.

Monetization progress

Roblox's primary means of generating revenue from its users is through the sale of virtual currency called Robux. When users sign up, they can explore millions of free experiences on the platform, including games. But users can also purchase Robux to unlock additional content across most of the free experiences available. They can also use Robux to buy clothing accessories, emotes, and other enhancements for their avatars. 

Engagement has been extremely high during the pandemic. In 2020, daily active users nearly doubled to 32.6 million. These users spent an average of 2.6 hours per day on the platform, which added up to over 30 billion hours of total engagement for the year -- a level on par with time spent on social-media platforms. 

This high level of engagement translated to $1.9 billion in bookings, or average bookings per daily active user of about $58 for the full year. On a quarterly basis, this metric increased to a high of $17.30 in the fourth quarter, representing an increase of 40% year over year.

A bar chart showing the increase of Roblox's average bookings per daily active user.

Data source: Roblox. Chart by author.

The average spending per user has increased over 30% since 2018, but there is a lot more room for growth over the long term. While its users are drawn to the gaming experiences on Roblox, which are accessible across PCs, mobile devices, and Microsoft's Xbox console, only 15% of them are above the age of 25.

A quick comparison with leading mobile-game maker Zynga reveals Roblox's opportunity. Zynga finished 2020 with 27 million average mobile daily active users across its games and generated $2.3 billion in total bookings. That's bookings per daily active user of $84, which is nearly 50% more in bookings per user than Roblox. 

That gap between the two explains why Roblox sees "significant potential to increase monetization" over the long term, as it states in its IPO filing. It has a growing roster of eight million developers that are building experiences on the platform, and management has some things up its sleeve to help them to accomplish that.

Long-term monetization opportunities

With so many developers joining the platform, there are bound to be plenty of creative minds coming together to think up new avatars and accessories that can drive growth in user spending. For example, Epic Games' Fortnite, the popular multiplayer shooter, has generated billions in revenue from in-game spending, largely thanks to the creative flair that goes into designing items that players want to buy, such as new character outfits and emotes. 

For its part, Roblox is investing in higher-fidelity graphics capabilities, which will make the content more appealing, especially as it tries to widen the base to older demographics. 

Roblox recently introduced a subscription service, Roblox Premium, which allows users to acquire Robux for a monthly fee. This builds an added incentive for developers to create more engaging experiences, since they can earn a prorated share of this subscription fee based on the time a user spends with their content. 

Advertising is another opportunity. Top brands, including Netflix, Walt Disney's Marvel, and Warner Bros. Pictures, have already released branded content on Roblox. These relationships could foster marketing partnerships that could provide Roblox with a lucrative stream of advertising revenue over time. Zynga, for example, generated 17% of total bookings from ads in the fourth quarter. 

First-quarter guidance

While management expects bookings to grow between 120% and 130% year over year in the first quarter, full-year guidance calls for lower growth between 6% and 13%. For perspective, Roblox grew bookings 39% in 2019. 

Roblox should continue to expand its platform over the long term by bringing in more gamers and engaging them the same way it does with existing users. For the first quarter, management expects daily active users to increase between 59% and 68% year over year, although growth may slow significantly in subsequent quarters as it laps the acceleration that occurred in 2020.

It's for these reasons that investors should track the effectiveness of management's monetization efforts, as measured by the change in average bookings per user. Analysts may have a good idea of how many users Roblox can attract, but they may not have a clear view on the long-term trajectory of average bookings per user.

As management continues to execute its monetization strategy, further upside in average spending per user will be a major catalyst for this growth stock.