Roblox (RBLX 0.90%) shares are down slightly following the company's second-quarter earnings report earlier this month. The gaming platform provider is not performing nearly as well as its reported 30% increase in revenue would suggest. In fact, Roblox is struggling to monetize its growing user base.
Average bookings per daily active user (DAU) fell to $12.25, which is down from the peak of $17.30 in the fourth quarter of 2020. Let's see what's causing the downward trend and whether Roblox is the best gaming stock to hold.
Roblox needs to better monetize its users
Bookings are a non-GAAP (adjusted) measure of revenue, one that in this case captures the actual amount of cash the company receives when a user purchases its virtual currency, Robux, on the platform. Bookings have been trending in the wrong direction in recent quarters and fell 4% year over year (YOY) in the last quarter.
Image source: Roblox.
Investors who are bullish on Roblox's prospects might point to growth in DAUs as a sign that the business is still in solid shape. However, the company's 21% increase in DAUs last quarter doesn't tell the whole story. While that rate of increase looks healthy, bookings are not keeping up with the increase in users.
Average bookings per user fell 21% YOY. Clearly, the average user is not purchasing as much Robux as they were a year ago. It's somewhat puzzling, since Roblox is not short on content to keep users engaged.
Image source: Roblox.
There are major brands putting experiences on the platform, including Kering's Gucci, Nike, and PVH brand Tommy Hilfiger. Obviously, these brands see value in Roblox's growing user base of 52 million DAUs. Content is definitely not the problem, and management noted on the earnings call that the quality of content on the platform is getting better.
Some of the difficulty has to do with difficult YOY growth comparisons to the strong engagement Roblox reported in the first half of 2021. Another factor is the transition Roblox is experiencing with older users starting to spend more time on the platform.
Roblox is not just for kids anymore
Roblox has seen a huge increase in users over age 13 over the last few years. The aging up of the platform follows investments in new features, such as voice chat, more mature content, improvements to Roblox's language translation system, and better personalization with search and discovery.
In July, DAU growth accelerated to 26% YOY, and total hours of engagement hit 4.7 billion, up 25% over the year-ago quarter. Based on bookings per hour, users between 17 and 24 years old had a faster rate of bookings growth in July than users between 9 and 12.
The growing engagement from these older users is important because they tend to monetize better than younger users. Users between 17 and 24 have more control over their money, so investors should expect to see bookings growth eventually pick up again as Roblox continues to shift its platform toward an older audience.
Is Roblox the best gaming stock to buy now?
There are early signs of a turnaround. Management said July was the company's biggest month of engagement in its history. For the second quarter, total hours of time spent on Roblox was nearly 11.3 billion, up 31% over the same quarter in 2020.
But at some point, investors need to see improvement in the numbers that ultimately drive higher returns for shareholders -- bookings and profits. The decline in bookings per DAU shows that Roblox still has work to do to better monetize its player base.
The problem is that investments in technology infrastructure to improve the platform will pressure profitability in the near term, which adds more uncertainty for investors to digest and could weigh on the stock's performance.
With the stock up 40% over the last three months and trading at a higher valuation, investors should consider other growth stocks that are reporting stronger revenue and profit growth.
Looking at other stocks in the gaming industry, Electronic Arts reported strong growth on the top and bottom lines last quarter and looks like a stock more worth considering than Roblox right now
