There is a lot of talk these days about the metaverse -- a term that has been defined in several ways. In general, though, it references a persistent digital space where users can be immersed in a virtual or augmented reality. And although the idea may be new to investors, one company has a huge head start on building part of the metaverse.
Roblox (RBLX 1.60%) has been offering a platform that brings millions of people together in a virtual space since its founding in 2004. The platform is different from many others because it is free to play, and relies on games created by a community of developers, as well as purchases of Robux, its platform-specific virtual currency. The company has put up impressive financial results since its March 2021 initial public offering. But there are operational metrics that highlight just how strong a position the company is in.
Image source: Getty Images.
Measure what matters
Wall Street loves revenue growth -- and Roblox hasn't disappointed on that score. Every quarter, it has delivered year-over-year revenue growth of more than 100%. That's more than doubling sales. But the company points to three operating metrics that it sees as meaning more to its long-term success.
RBLX Revenue (Quarterly YoY Growth) data by YCharts
The platform is attracting more users
Its daily active user metric counts the number of people who log in through the website or mobile app on a unique account each day. Management likens it to the size of the audience, and they are actually conservative in defining it. If the same person logs in twice in 24 hours, they are only counted once, even if the logins occur on different calendar days.
As you might expect, the amount of time people spend playing video games varies seasonally. So looking at growth on a purely linear timeline would make trends difficult to discern. Instead, it's better to compare each fiscal quarter across years. This shows Roblox's steady uptick in daily active users.
Data source: Roblox. Chart by author.
Its users skew younger than those on other video game platforms. Some reports show the average gamer is in their mid-30s. In the latest quarter, 49% of Roblox users were under 13 years old. That was down from 57% at the beginning of 2019. For Roblox to succeed, it will need to grow its appeal with the more mature demographic that has access to more disposable income. So far, the company is making progress.
Those users are playing longer
Looking at the quarterly number of hours people are on the Roblox platform tells a clear story. Growth is robust. This metric includes the time spent in "experiences" (titles created by developers), in addition to chatting or creating personalized avatars.
Hours of engagement jumped significantly in the second quarter of 2020 due to the lockdowns, school closures, and social-distancing measures related to the onset of the COVID-19 pandemic. In fact, hours spent on the platform climbed 165% year over year in that quarter. Amazingly, Roblox has maintained those gains and built on them. In Q3 2021, that number was three times higher than in Q3 2019.
Data source: Roblox. Chart by author.
But monetization may have hit a plateau
One hiccup in the growth story is what the company is bringing in from each user. While the chart below shows a significant jump from 2019 to 2020, that gain was pandemic-fueled. That's why the first quarter of 2021 showed strong year-over-year growth while quarters two and three were essentially flat. Shareholders should expect the same when management reports its fourth-quarter results this month. Wall Street's mood at the time might determine how the news is taken.
Data source: Roblox. Chart by author.
The prospect of profitability is very real
Even with its stagnation on the bookings per user metric, Roblox has continued to inch toward profitability. Its operating margin is negative, but improving. However, what investors really care about is cash. Roblox is generating free cash flow, and has plenty of cash on its balance sheet.
RBLX Free Cash Flow data by YCharts
Adding up the numbers, Roblox looks like a strong business with engaged customers who are, on average, spending an increasing amount of money on the platform. As it attracts older users -- and it almost certainly will as the metaverse gains traction -- the current lull in the growth of billings per user should end. The stock is now down by about 51% from its recent high: Investors with long time horizons might want to take advantage of that slump to add Roblox to their portfolios.
