Some investors have theories about why Roblox (RBLX 1.35%) stock can go up in value. These are called investment theses.
A thesis for Roblox stock might go something like this: Roblox is a video game platform that was primarily used by children under 13 years old. But increasingly, people older than 13 years old are using the platform for more than just games -- the platform is being used for immersive digital experiences. By greatly increasing the platform's use cases and by expanding the user base, Roblox has a great opportunity to grow its high-margin revenue.
If any of this investment thesis with Roblox resonates with you, then here's one trend you need to look at, because it calls the whole thing into question.
One troubling trend for Roblox
To firmly establish trends, investors have to look at long-term statistics. And fortunately, Roblox provides some very helpful ones for investors. For the purposes of this article, we can look at the second quarter of 2023 and compare it with results from the second quarter of 2020 -- the three-year trend.
The following trend supports the aforementioned Roblox thesis. The chart below shows that its older user base is growing faster than the younger one.
| Age Demographic | Q2 2020 | Q2 2023 | Change |
|---|---|---|---|
| Users under 13 | 17.9 million | 28.2 million | +58% |
| Users over 13 | 14.6 million | 36.8 million | +152% |
Source: Roblox presentation. Chart by author. Note that a small percentage of the user base is of unknown age.
As of Q2, 56% of the user base for Roblox is over 13 years old compared with just 44% of the user base in the same quarter of 2020. This is precisely the trend that many Roblox shareholders want to see.
Roblox shareholders want to see this trend because teenagers and adults have more spending power than children.
This is probably a good place to talk about how Roblox makes money. Roblox provides a platform that allows developers to create, not necessarily games, but experiences. While Roblox is free, certain elements require the in-game currency Robux. Users deposit money to buy Robux, which is recorded as bookings -- a common video game metric. When Robux is spent, Roblox's cut is counted as revenue, while some of the money is paid out to the developers.
With the rising average age of Roblox's user base, one would expect to see an increase in bookings per user. But that's not what's happening, as the chart below shows.
| Q2 2020 | Q2 2023 | Change | |
|---|---|---|---|
| Average bookings per daily active user | $14.81 | $11.92 | (20%) |
Source: Roblox's letters to shareholders. Chart by author.
Average bookings per daily active user is a quarterly figure for Roblox. Therefore, there can be some big fluctuations from one quarter to the next. But this metric has generally trended lower as the company's user base has gotten older, which is the opposite of what shareholders would expect and hope for. That's why this is a troubling trend.
A reasonable alternative explanation?
When using the scientific method to form an opinion, all variables must be accounted for. And there's another important variable to consider with Roblox that might explain the troubling trend with its bookings. Below is its user base by region.
| Region | Q2 2020 | Q2 2023 | Gain |
|---|---|---|---|
| U.S. & Canada | 11.4 million | 14.2 million | 25% |
| Europe | 9.9 million | 18.2 million | 84% |
| Asia Pacific | 4.6 million | 15.5 million | 237% |
| Rest of world | 7.4 million | 17.7 million | 139% |
Source: Roblox presentation. Chart by author.
As the chart above shows, most of Roblox's user growth in recent years has occurred outside of the U.S. and Canada. On one hand, international success is exciting. On the other hand, these regions are commonly monetized at a lower rate than the U.S. because of lower spending power.
There's two possible explanations for Roblox. First, it's possible that the company's older demographic is less willing to spend money on the platform compared to the younger demographic. Second, it's possible that the international user base spends significantly less on average compared to the user base in North America.
Either way, the takeaway is the same: Roblox users are spending less on average over time. In other words, new users are less valuable than past users because they're spending less on average. Therefore, user growth isn't the most important metric for shareholders to watch going forward.
Trading at nearly 7 times its trailing sales, Roblox stock still trades at a valuation that implies robust-growth expectations. But unless the company can succeed at better monetizing its audience, it may fail to produce that growth. And this is one reason I'm avoiding Roblox stock, at least until I see improvement.
