Roblox is a popular game, but lumping it with Fortnite, Minecraft, or other popular games, is a misunderstanding of what it actually is. Roblox is a hybrid gaming and social media platform. Think of it as a combination of Youtube, TikTok, and Twitch.

The consensus is that Roblox has impressive user growth. Regarding popularity (daily and monthly active users), it’s up there with Snapchat and TikTok. Hours engaged on the platform are unreal; users spend about 2.6 hours daily on Roblox vs. 1.5 on TikTok. Let’s put that in perspective. 2.6 hours per day is more than the user engagement on Spotify, a platform many users passively listen to in the background. X (Twitter) has 200 million active users who spend an average of 30 minutes daily on that social media app. The average Roblox user spends more time on the platform in a week than the average X user spends on the app in a month!

I have a small position in Roblox because of its potential. Roblox has the profitability of an addictive video game platform but the total addressable market of a social media company. Of course, anyone investing in Roblox should understand that they spend more money than they make. Infrastructure, trust, and safety costs are increasing and needed to grow the business.

The growing expenses are hard to stomach, but the opportunity is immense. The goal is to eventually support one billion daily active users on its platform. That puts its revenue significantly higher than the likes of Pinterest, Etsy, and Spotify and in the same breath as Mega-Tech.

One key metric analysts use when evaluating Roblox is the average revenue per daily active user (ARPDAU) which shows how well the company monetizes its platform off its users. Consistently rising ARPDAU usually means rising revenue and strong growth. These are typically companies you can invest in for the long term.

I believe Roblox can be an ARPDAU machine with simultaneous strong user growth. Roblox can generate revenue in many ways and not just through ads. In contrast, its competitors will face a cap on monetizing their users.

Roblox checks the marks of a company that can eventually become Netflix on Steroids. I have four main questions about how big a growth monster this can become. Roblox passes all of them, while other entertainment platforms only meet some hurdles.

Is the platform unique, and can it be copied by big tech?

Regarding social experiences and user-generated content, Roblox is years ahead of Minecraft, Decentraland, Horizon Worlds, etc. TikTok offers a similar experience; however, Instagram Reels and, to a lesser extent, Youtube Shorts have closed the gap on TikTok. Roblox wins in providing an AR/VR experience or the Metaverse. It took several years to build this virtual 3D world, and would be difficult to replicate.

Does the platform provide a multi-sensory experience?

Spotify is a big loser as it is audio-only and handcuffs its potential. Roblox’s graphics and backgrounds will improve and be more realistic as technology improves. The Robolox, ten years from now, will look and feel drastically different. This is the bull thesis for the Metaverse. A better sensory experience equates to a more extensive user base. You will know the stock is a winner when you see grandma, grandpa, and the entire family on the platform, just as Facebook went from a small-user base of college students to a platform supporting over 3 billion monthly active users.

Is the experience a pitstop or a destination?

Roblox provides a virtual social experience. Dating apps like Tinder and Bumble are limited in their growth because the aim is to meet people outside of the app in real life. Since the experience of these apps is quite limited, they rely heavily on an ad-based business model. Only two companies (Meta and Alphabet) have proven this model works as a long-term sustainable revenue model. Roblox has much room to grow in ad revenue but other ways to drive revenue growth.

Do users have to be highly engaged in using the platform?

Both Netflix and Roblox provide a world-class user experience; however, viewers on Netflix are not “playing” on the platform; they are limited to only watching the content. Roblox has put itself in a class of its own regarding user engagement levels, even beating TikTok and Twitch.

The better the experience Roblox can provide its users and creators, increases the odds of a higher ARPDAU. Roblox has a significant advantage in this regard. There is nothing like it. The network effects are in play here. The better the infrastructure and platform, the more incentivized developers are to create better games and experiences. This leads to more companies buying ads and users who will spend more on digital items.

All of Roblox’s competitors have similar problems or Achilles heels. Roblox has the juicy monetization possibilities of a game but the scale and user base of a social media company. Again, all of this is based on a thesis that may not come to fruition, but the company is worth a look at its current levels, well below its IPO price.

Expenses will continue to rise, and profitability is more conceptual than mapped out. However, that is the right move in the long term. Roblox CEO and founder David Baszucki needs to be hyper-focused on growth instead of scaling for profitability. The priority right now should be growing market share and creating a strong network effect. If Roblox continues to attract users 17 and older and creates a true metaverse where users can engage in virtual experiences, the growth can be exponential. Scaling now to avoid significant costs could harm the company’s long-term prospects.

The hardest part of building a social media platform is convincing consumers to use and stay on. Suppose Roblox has a network effect and utilizes AI. In that case, it will eventually be able to reduce spending and monetize users more efficiently. When you see the hours of engagement on Roblox, scaling for profitability will be easier, especially if the user base continues to balloon.

I will hold my nose and jump in on Roblox. I call Roblox Netflix on steroids because Netflix has always spent a lot on making & marketing movies and shows. Spending aggressively on content has been necessary to grow and retains subscribers. Similarly, Roblox must do the same by spending on R&D and its growth. It could be a giant cash burn but a necessary one.

The risk is there, but I do see a life jacket. If things go south and my thesis fails, the platform is valuable enough to be bought out at a fair price for investors by one of the bigger tech players. Imagine Meta pairing Roblox with the Quest Pro or Apple with the Vision. I have no idea what price this would take, but the stock going to zero seems highly unlikely and something I am not worried about. If you invest in Roblox before the thesis is proven, you are likely getting in at a phenomenal cost basis. Imagine if you could have invested in Airbnb or Uber in 2013. Those two companies IPO’d several years after proving their business models worked, significantly lowering my interest in an investment. Roblox has the same feel as Netflix in the early 2000s. The brave willing to go risk-on now could look foolish or prophetically bold. I like what I see so far.