On Feb. 7, Roblox (RBLX 1.35%) reported financial results for 2023. The leading platform for online games and social experiences generated record revenue of $2.8 billion during the year, boosted by several encouraging metrics.
For starters, Roblox ended the year with 71.5 million daily active users, its most ever and a 22% year-over-year increase. Moreover, users spent 15.5 billion hours using Roblox's platform in the fourth quarter of 2023, which was up 21%. And with more users spending more time on the platform, it had Q4 bookings growth of 25%, which was its best bookings growth in two years.
Roblox's top-line metrics are trending in an encouraging direction but it's a different story on the bottom line. The company had nearly a $1.2 billion net loss in 2023, worse than its loss of more than $900 million in 2022.
Here's the thing -- both of these trends are expected to continue for Roblox in 2024. Management just guided for full-year 2024 revenue of at least $3.3 billion, which would be an all-time high. But it also expects a full-year net loss of around $1.4 billion, which would be its worst as a public company.
With both revenue and losses expected to hit records in the coming year, what should Roblox investors do now?
Why is Roblox losing money in the first place?
Looking at the numbers on the surface, it wouldn't seem like Roblox should be losing much money. The company has a high gross-profit margin of nearly 77% and it's been going up. Given this reality, one might think that Roblox was getting closer to breakeven, not losing even more money.
When talking about its cost of revenue, Roblox leaves a lot out of the equation for this line item. The company primarily only accounts for payment processing fees, such as credit cards and app store take rates. It's not accounting for things such as the cost of building and maintaining its own computing infrastructure.
Roblox is also not accounting for what it pays independent developers. For those unaware, the company doesn't make the digital content on its platform -- it merely provides software for independent creators and developers to use in building things for the platform. Roblox then pays these third parties based on the performance of their content. It calls these payments "developer exchange fees."
Infrastructure costs and developer exchange fees are real expenses for Roblox and it couldn't do business without them. And unfortunately, they're eating up a lot of the gross profit. Developer exchange fees alone cost 26% of Roblox's revenue in 2023 -- a big number. Infrastructure, trust, and safety expenses cost the company even more, accounting for 31% of revenue. After these two line items come the more typical operating expenses, which all add up to account for its overall net losses.
RBLX Net Income (TTM) data by YCharts
Can Roblox turn profitability around?
Of course, Roblox can turn its profitability around but the reality is it will be a long road. Many of the company's expenses will increase at about the same rate as revenue.
For example, for users who purchase its in-game Robux on the mobile app, Roblox will pay hefty fees to the app stores on a percentage basis. Moreover, the company will be paying out roughly the same percentage of its revenue to developers for the foreseeable future. And it will need to continue spending on research and development to stay ahead of the competition.
That said, Roblox is developing new revenue streams with different cost bases, which could help improve things in time. One such example is advertising. Roblox is now working with brands to have ads displayed within experiences on the platform. Developers will still get their piece of the pie. But it's an opportunity to boost revenue while maintaining some of its other operating expenses, including infrastructure.
In my view, the key to better profitability is developing other revenue streams. And the key to developing other revenue streams will be user growth and engagement, particularly among older demographics with greater spending power. Roblox provides information on this group. Users over 13 years old comprise 58% of the overall user base and this demographic grew 28% in Q4. That's good. Investors will want to see more of this trend.
In conclusion, Roblox is still reaching record heights but investors hoping to see some profits will likely need to wait for quite some time. However, the company is growing its user base and it's growing particularly well among older users, which may be what it needs to develop other revenue streams and improve its bottom line. Therefore, there is reason for optimism for patient long-term investors.
