I’m hunting for a new company to add to my Stocks and Shares ISA in May. One I’ve been watching for a few months now is gaming platform Roblox (NYSE: RBLX).
The share price recently neared a 52-week high after the firm reported a strong first quarter. However, at $70, it’s still 48% lower than where it was in November 2021.
Quick low-down
As I’m sure most parents of schoolchildren are aware, Roblox is a gaming company. It lets users play and and explore millions of virtual worlds and games. Like YouTube, it’s a creator-driven platform, where developers can earn money from their creations.
As parents will also know, players can customise avatars and unlock features through Robux, the platform’s virtual currency. I finally took the plunge this year, buying my daughter £20 worth of Robux as a reward for doing well at gymnastics. The money lasted less than 24 hours!
A powerful thing I’ve noticed on the platform is the term ‘Bacon’, which refers to default avatars/new users that have brown hair that resembles strips of bacon. Kids nowadays do not want to be labelled a Bacon, leading to increased pressure on parents to buy Robux.
Strong growth
In Q1, Roblox’s daily active users (DAUs) surged 26% year on year to 97.8m, while hours engaged were up 30% to 21.7bn. DAUs in India grew 77%!
So you’ve got more people spending longer on the platform, which is what I want to see as a potential investor.
Bookings jumped 31% to $1.2bn, with monthly unique payers reaching 20.2m, an increase of 29%. Free cash flow more than doubled to $426.5m.
Another thing I want to know is whether Roblox is still attracting users that are older than 13. Encouragingly it is, as this reported cohort grew 36% and now makes up 62% of total DAUs and 64% of total hours. So Roblox is increasingly not just about tween players these days.
All of these numbers were higher than expected. For 2025, management now expects bookings between $5.28bn and $5.36bn, which would represent solid growth of about 22%.
Risks
While Roblox is booming, there are a couple of things that worry me. One is regulatory risk, given that the platform is still mainly for kids that need to be kept safe. Another is extremely high levels of stock-based compensation — over $800m last year! — which continues to depress reported earnings.
Also, after its strong run, the stock’s forward price to free cash flow ratio is approximately 53. This indicates that a lot of growth is priced in.
Finally, while Roblox is fully virtual/digital and therefore insulated from tariffs, it might not be from spending pressures during a recession.
What about the future?
Roblox is confident it can carry on growing at 20%+ and is targeting 10% of the global software gaming market, up from about 2.75% today.
Longer term, it’s aiming for 1bn players. Needless to say, a platform with that many users would be worth significantly more than the current $47bn market cap. That’s because many advertisers will pay up to reach a huge young audience.
I think advertising is a massive long-term opportunity here and I’m interested in investing. I’d just prefer to do so at a lower price, so I’m keeping Roblox on my watchlist for now.
