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Is It Time To Buy Roblox After Its Post-Earnings Jump Today?

Roblox reports other-worldly Q3 earnings — could the next Facebook or Netflix be right in front of you or will momentum slow over time?

Roblox (NASDAQ: RBLX) is one of those companies that can be tricky for investors to get behind as most of us probably aren’t playing an online game that is predominantly made for children and young adults. 

What does Roblox do?

It’s more than a game, it’s a type of — don’t say it, don’t say it, don’t say it — metaverse. Well, for better or worse, it is. Roblox isn’t a single game for a console, it’s a combination of a virtual platform and a social media network where users can create and game with friends. It supports iOS, Android, PC, Mac, and Xbox., so it’s by no way limiting itself to new users.

A simple way to look at it is like YouTube. Just like there are millions of videos on YouTube, there are millions of games on Roblox, and the content or games are made by the users. The creators and developers on the Roblox platform are the main reason why new users come along because the games improve over time, and more eyeballs lead to more revenue, which allows Roblox to share a piece of the pie with its creators and game developers. So how does Roblox generate revenue?

How does Roblox make money?

The platform operates a freemium model. Though it is free to use, players have to pay in order to unlock exclusive features, accessories, and customizations.

What’s unique is the method of payment. Users have to purchase Robux — the world’s digital currency — this means that even if users don’t initially spend their balance, Roblox has still generated revenue. Robux can be purchased on a pay-as-you-go model, but the platform also has Roblox Premium, a subscription service that adds Robux to a user’s account each month. Roblox also generates revenue from advertising for brands — companies like Disney (NASDAQ: DIS) have used the platform to launch in-game events to promote new movies.

Other revenue streams include licensing for the manufacturing of physical toys based on popular Roblox characters, and royalty fees whenever IP is used. 

Roblox’s Q3 earnings report

Revenue grew 102% year-over-year to $509 million. Daily active users grew 31% to 47 million, and these users spent a combined 11 billion hours on the platform in Q3. The company has more than doubled its research and development investment, now at $138 million v.s $52 million a year ago, as Roblox continues to expand its network. 

Is it time to buy?

Roblox’s north star metric is time spent on the platform — the more time on the platform, the more likely users are to spend money or buy Robux.  In 2020, this was over 30.6 billion hours of engagement. 

With 2020 being the year that we were all locked up at home, you would think Roblox’s best days are behind them, but far from it. Roblox is already close to passing last year’s achievement because in the first 3 quarters of 2021, it has 29 billion hours of engagement locked in. It isn’t getting the same triple-digit percentage growth year-over-year the platform experienced from Q2 2020 to Q4 2020, but the fact that engagement remains that high, and is in fact growing, is extremely impressive.

The biggest risk with any product or service targeted at younger audiences is going out of style — trends change rapidly as the next new thing comes, especially within these age brackets. On the other hand, the platform has shown robust growth even with the back-to-school seasonality that many thought would negatively affect earnings. From that standpoint, and given the structure and rewards system in place, this is definitely a stock worth a second look. Potentially, it could be a long-term winner in gaming, just like Minecraft has been for more than a decade.

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