Roblox (RBLX -1.07%), a leading online gaming platform, delivered a better-than-expected result for the quarter ended Sept. 31, 2021. Investors reacted positively to the announcement, sending Roblox's stock to a new high of $141.60. The stock has since fallen back to below $100 as the earlier optimism wore off.
Still, there are good reasons to stay bullish on the company's long-term prospects. Here are two obvious ones.
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Roblox will continue to attract new users
Founded in 2004, Roblox has more than 47.3 million daily active users (DAU), making it one of the most popular gaming platforms among the younger generation. While it was already growing nicely before COVID-19, the pandemic accelerated its growth, as DAU almost doubled in 2020.
Roblox performed well last year, but there are concerns that it will face challenges to sustain its user growth post-pandemic. Users who are going back to school and work will likely spend less time playing Roblox's game. For perspective, Roblox added about 10 million users in the first three quarters of 2021, much lower than the 17 million added in the same period last year.
Still, Roblox is well-positioned to continue growing its user base in the future -- albeit at a slower rate. As a start, the developers on Roblox's platform are constantly developing new and better-quality content over time. High-quality content will help retain old users and attract new users to Roblox's platform. A growing user base, in turn, generates more income for developers -- which further incentivizes them to improve their content offerings. The result is a virtual cycle of ever-growing content and user base.
With ever-expanding content, Roblox can now target wider audience groups. In particular, the tech company is investing aggressively to expand its reach among older users and into international markets. For example, Roblox employs artificial intelligence to help developers automatically translate games into local languages and implement policies according to local regulations.
So far, there are signs that its effort is paying off. In the first quarter of 2019, 41% of Roblox users were above 13 years old and 35% were from regions outside of the U.S., Canada, and Europe. The comparable figures in the third quarter of 2021 were 50% and 49%, respectively. If Roblox can sustain this momentum, there is a good chance that it could eventually hit its long-term target of 1 billion users.
Roblox beyond gaming
Historically, investors have generally regarded Roblox as an online gaming platform. While this is true, there's much more to Roblox's platform: It is a social platform for users to socialize with their friends, an education platform for people to learn about various subjects, a music platform for artists to launch their new music and interact with their fans in real time, a branding platform for brands to build a direct relationship with customers, and others. In short, there are already many use cases for the Roblox platform, and we can expect those to grow further over time.
As Roblox's use cases grow, it will be in a prime position to improve its monetization. Presently, the gaming company generates the bulk of its revenue from taking a cut of user spending on its platform. For example, if a customer spends 100 Robux (virtual currency used on Roblox's platform) on a virtual item, Roblox will keep 30 Robux while the rest goes to the developers. Besides, it also generates commission from the conversion of Robux back into fiat currency.
In the future, Roblox has a good shot at adding new income streams such as subscription, advertising, and e-commerce. The company is already offering a monthly membership service and working with brands -- such as Nike and Gucci -- on advertising opportunities.
And as the Roblox platform becomes more ubiquitous over time thanks to the proliferation of the metaverse industry, it will have plenty of new opportunities to mint cash. All investors need is some patience.
