Gaming metaverse operator Roblox (NYSE:RBLX) beat analysts' expectations in Q4 CY2023, with revenue up 29.5% year on year to $749.9 million. It made a non-GAAP profit of $0.31 per share, improving from its profit of $0.20 per share in the same quarter last year.
Roblox (RBLX) Q4 CY2023 Highlights:
- Revenue: $749.9 million, ahead of analyst estimates
- EPS (non-GAAP): $0.31 vs analyst estimates of -$0.56 ($0.87 beat)
- Gross Margin (GAAP): 77.1%, up from 75.4% in the same quarter last year
- Free Cash Flow of $78.11 million, up 31.3% from the previous quarter
- Average Daily Active Users: 71.5 million, up 12.7 million year on year
- Market Capitalization: $23.16 billion
Best known for its wide assortment of user generated content, Roblox is (NYSE:RBLX) an online game platform and game creation system.
Roblox is a multi-sided platform that connects players/users with creators/developers and other stakeholders (e.g. advertisers). It is one part operating system and one part app store. The ecosystem allows players to play a near infinite catalog of games, which is continuously being added to, as more players join the ecosystem and experiment with creating their own games and virtual items. Roblox provides creators/developers with proprietary tools to design and build experiences, games, items, and even other developer tools that can be monetized.
Roblox has its own currency, Robux, whereby users can deposit cash to purchase virtual items OR earn Robux by selling their own items or developer tools, which can be converted into actual currency. Adjacent stakeholders can take almost infinite forms – many not yet developed. Current examples are musicians performing virtual concerts or brands like Gucci or Nike creating digital experiences.
Video Gaming
Since videogames were invented in the 1970s, they have gradually taken more share of entertainment time. Ubiquitous mobile devices have powered a surge in “snackable” games that can be played on the go. Over time, games have developed more social engagement features where friends can play games together over the internet. The business models of games publishers have become less volatile due to digitization of distribution, in game monetization, and like Hollywood, an increasing dependence on surefire hit franchises. Covid driven lockdowns accelerated adoption and usage of videogames – a trend that has not slowed.
Roblox (NYSE:RBLX) competes with other large video game publishers EA (NASDAQ: EA), Activision (NASDAQ: ATVI), Take Two Software (NASDAQ: TTWO, Zynga (NASDAQ:ZNGA) and Nintendo (TSE:7974).
Sales Growth
Roblox's revenue growth over the last three years has been mediocre, averaging 17.9% annually. This quarter, Roblox reported solid 29.5% year-on-year revenue growth but fell short of Wall Street's expectations.
Usage Growth
As a video gaming company, Roblox generates revenue growth by expanding both the number of people playing its games as well as how much each of those players spends on (or in) their games.
Over the last two years, Roblox's daily active users, a key performance metric for the company, grew 22.8% annually to 71.5 million. This is strong growth for a consumer internet company.
In Q4, Roblox added 12.7 million daily active users, translating into 21.6% year-on-year growth.
Revenue Per User
Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like Roblox because it measures how much revenue each user generates, which is a function of how much paying users spend on its games.
Roblox's ARPU has declined over the last two years, averaging 2.1%. Although it's unfortunate to see the company lose its pricing power, it was still able to achieve strong user growth. This quarter, ARPU grew 6.5% year on year to $10.49 per user.
Pricing Power
A company's gross profit margin has a major impact on its ability to exert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor.
Roblox's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 77.1% this quarter, up 1.7 percentage points year on year.
For gaming businesses like Roblox, these aforementioned costs typically include royalties to sports leagues or celebrities featured in games, fees paid to Alphabet or Apple for games downloaded in their digital app stores, and data center and bandwidth expenses associated with delivering games over the internet. After paying for these expenses, Roblox had $0.77 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.
Gross margins have been trending up over the last 12 months, averaging 86.9%. Roblox's margins are some of the highest in the consumer internet sector, enabling it to fund large investments in product and marketing during periods of rapid growth to stay one step ahead of the competition.
User Acquisition Efficiency
Unlike enterprise software that's typically sold by dedicated sales teams, consumer internet businesses like Roblox grow from a combination of product virality, paid advertisement, and incentives.
Roblox is extremely efficient at acquiring new users, spending only 8.4% of its gross profit on sales and marketing expenses over the last year. This efficiency indicates that it has a highly differentiated product offering and customer acquisition advantages from scale, giving Roblox the freedom to invest its resources into new growth initiatives while maintaining optionality.
Profitability & Free Cash Flow
Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.
Roblox reported EBITDA of $259.6 million this quarter, resulting in a 34.6% margin. Furthermore, Roblox has shown strong profitability over the last four quarters, with average EBITDA margins of 15.4%.
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Roblox's free cash flow came in at $78.11 million in Q4, turning positive year on year.
Roblox has generated $124 million in free cash flow over the last 12 months, or 4.4% of revenue. This FCF margin stems from its asset-lite business model and enables it to reinvest in its business without depending on the capital markets.
Balance Sheet Risk
As long-term investors, the risk we care most about is the permanent loss of capital. This can happen when a company goes bankrupt or raises money from a disadvantaged position and is seperate from short-term stock price volatility, which we are much less bothered by.
Roblox is a well-capitalized company with $2.19 billion of cash and $1.65 billion of debt, meaning it could pay back all its debt tomorrow and still have $541.8 million of cash on its balance sheet. This net cash position gives Roblox the freedom to raise more debt, return capital to shareholders, or invest in growth initiatives.
Key Takeaways from Roblox's Q4 Results
It was great to see Roblox's strong user growth this quarter. We were also glad it produced solid revenue growth and earnings, which topped analysts' estimates. Overall, this was a good quarter for Roblox. The stock is up 1.5% after reporting and currently trades at $37.23 per share.
Is Now The Time?
Roblox may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
There are several reasons why we think Roblox is a great business. For starters, its revenue growth has been decent over the last three years, and its growth over the next 12 months is expected to exceed that. And while its ARPU has declined over the last two years, the good news is its impressive gross margins are a wonderful starting point for the overall profitability of the business. On top of that, its user acquisition efficiency is best in class.
At the moment Roblox trades at 45.7x next 12 months EV-to-EBITDA. But looking at the consumer internet landscape today, Roblox's qualities stand out and we still like it at this price.
Wall Street analysts covering the company had a one-year price target of $45.24 per share right before these results (compared to the current share price of $37.23), implying they saw upside in buying Roblox in the short term.
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