Gaming platform Roblox (RBLX 1.35%) has received plenty of investor attention since the pandemic's onset. Its main product initially caught on with pre-teens, so the opportunities to engage with the Roblox app surged when students were sent home as part of broader COVID-19-related lockdowns. With just about all students now back in school or once again permitted to gather together for away-from-home activities, Roblox's engagement levels have leveled off or fallen and investors are worried.
While much of the investor attention has been focused on Roblox's short-term boom and reversal, some investors are losing sight of the strong long-term prospects of this company. Roblox's future has at least two meaningful green flags that should appeal to long-term investors. Let's take a closer look at each and see why they emphasize the investment potential for this company.
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1. Advertising is a growing source of new revenue
The Roblox app is free to join and use. The company generates revenue by selling users something called Robux, an in-game currency required to access premium items and experiences. So far, Roblox has only monetized a small fraction of its 53.1 million daily active users. Management is aware of this untapped opportunity and is developing new ways to monetize more of its users.
For instance, Roblox is in the beginning stages of developing native and immersive advertising on the platform. When this is available, it could be an excellent way for Roblox to monetize the millions of daily active users who never buy Robux. Marketers spent $763 billion on advertising in 2021, up 22.5% from 2020. The lion's share went to digital channels like social media, streaming TV, and display ads. The appetite from marketers is increasingly shifting to digital because that's where folks are spending more of their time.
How much revenue Roblox could bring in through advertising once it's up and running is still unclear. It will likely be a significant sum and should help grow Roblox's $1.9 billion in revenue in 2021. After making the investments in developing the capability, the ad revenue should be highly profitable as each incremental dollar of ad revenue will require minimal cost to Roblox.
RBLX Revenue (Annual) data by YCharts
2. Roblox has a cash-friendly business model
While Roblox makes money by providing items and experiences in exchange for Robux, it doesn't create these items and experiences itself. Instead, it outsources these activities to third-party developers who take on the risk and spend the resources to develop games and items they hope Roblox users will spend Robux to buy. These developers receive a percentage of the revenue their creations generate.
This business model is friendly to Roblox's cash flows. Roblox doesn't need to add as many in-house developers and the outside developers assume the risk if what they create doesn't generate enough revenue to justify the production costs and effort. Effectively, that means Roblox only pays outside developers for successful games that users love (as demonstrated by their willingness to spend Robux). But before players can spend money on developers' creations, they must first buy Robux. In that way, Roblox takes money upfront and gets to use it as needed until developers create something players will spend money on.
RBLX CFO to Sales (TTM) data by YCharts
Indeed, while Roblox is not profitable on the bottom line, the aspects of this business model allow it to generate healthy cash flow from operations. As the chart shows, the trend is moving downward as engagement trends reverse from the pandemic boost. Still, the underlying strategy of taking cash first and paying developers later is a green flag for long-term investors.
