Risks at Roblox (RBLX)
Questionable earnings quality and a fragile operating model
RBLX operates a digital social platform where people can build an avatar, explore new virtual worlds, and interact with each other. The platform is free to use and the majority of users do not pay RBLX at all. During 2024, RBLX had an average of 82.9 million daily active users, but only 1.0 million paying users. The bulk of the users are young kids – 20% are under 9 years old, another 20% are 9-12 years old, and 16% more are 13-16 years old.
RBLX earns money by having users buy its virtual currency called Robux, which can be used to purchase avatars and accessories, or access premium areas on the platform. It also earns money by having users become premium members by paying a monthly fee that entitles them to better deals on Robux purchases.
The company loses money on a GAAP basis and only guides to Revenue, Bookings (Revenues + change in deferred revenues), Adjusted EBITDA, and Free Cash Flow. We see several issues with earnings quality along with sizeable potential operating model risks. We doubt the company will earn GAAP profits any time soon with stock compensation at 26%-28% of revenues:
We get behind RBLX’s numbers below: