Even though it has been around now for decades, the internet is still a young and immature industry. There is constant disruption taking place across various internet sectors. Google disrupted Yahoo! in search engines, Facebook disrupted MySpace and now looks to be getting taken over by Instagram and TikTok, and the cloud disrupted on-premise IT providers -- and there are plenty more examples to be had.
Looking at the long-term performance of these internet giants, it clearly can be incredibly profitable to invest in them early. One business looking to disrupt the current internet landscape now is Roblox (RBLX +0.76%). Let's see if this kid-friendly gaming service can build itself into the next great internet giant and become one of the best-performing stocks of this decade.
What is Roblox? How does it make money?
Roblox is a unique service. In a broad sense, you could define it as a gaming company, but Roblox itself doesn't actually publish any games. Instead, third-party developers build games and social experiences for the millions of Roblox users. Think of it like YouTube but for online gaming, where Roblox builds development tools so studios can build games for the growing library of content on the Roblox platform.
As of its latest update, Roblox had 61.5 million daily active users (DAUs). It makes money in a variety of ways, but the most important is its on-platform virtual currency, called Robux. The Roblox virtual economy works like this: A user will buy Robux from Roblox, then purchase an item from one of the games on the platform. Roblox will then send some of the proceeds to the game developer in order to incentivize them to keep building for Roblox. It also sends some over to the app stores run by Apple and Alphabet's Google, and then keep the rest for itself.
Aging up and international expansion
The key for Roblox to grow its revenue is to grow its DAUs and hours engaged on the platform. The more time people spend on Roblox, the more likely they are to buy Robux, plain and simple. Roblox has done a fantastic job in recent years growing its "hours engaged," which is its internal estimate for the time spent on Roblox during any period.
In December, the company estimated that users spent a whopping 4.7 billion hours engaged on Roblox that month, up 21% year over year. This is more hours than users spent in the entire fourth quarter of 2019, which shows how fast Roblox has grown in the last couple of years.
A lot of this past growth has come from kids under the age of 13 in North America, which was Roblox's first big user demographic. But recently, it has started to make investments for its next leg of growth, which will be older kids and international markets. Last quarter, DAUs over the age of 13 grew 34% year over year to 31.9 million, while the Europe and Asia Pacific regions grew DAUs by 30% and 40%, respectively.
Even better, according to management, users age 17 to 24 are the fastest-growing age cohort on Roblox right now. If this trend continues, Roblox should be able to consistently grow both hours engaged and DAUs for the foreseeable future, which will lead to consistent revenue and earnings growth.
While not as viral as older applications like TikTok or Instagram when they first launched, Roblox has shown a consistent track record of growth. If it can continue growing internationally and within the young adult demographic, it should become one of the most used internet services in the world at some point this decade.
NYSE: RBLX
Key Data Points
The stock does not look cheap
As of this writing, Roblox has a market capitalization of $22.3 billion. When looking at its trailing-12-month bookings (a metric that is the sales equivalent for gaming companies) of $2.74 billion, the stock looks expensive. Its price-to-sales (P/S) ratio using bookings is 8.1, which is well above the market average of 2.4.
Roblox is not very profitable either, with only $57 million in free cash flow generated over the last 12 months. Yes, the company is reinvesting heavily for growth right now, but investors need to expect profits to start showing up eventually, or else the stock is not going to be worth anything close to its current value.
Looking at its historical growth rate and potential to grow with its new target regions and demographics, I think Roblox has plenty of runway to grow the users on its platform and could potentially become one of the next gigantic internet platforms. However, investors need to be aware that the stock is currently at a premium valuation, and if the company is unable to achieve its vision to age-up users and grow internationally, there is a lot of potential downside for the stock.
