Roblox: Meta's Only Real Competitor.
Q1 2025 ER Digest
This is an update of my original Roblox deep dive.
Roblox continues to exhibit signs of extraordinary process power. I believe it’s likely Roblox evolves into planetary-level social media platform over the next five to ten years.
I continue to believe Roblox is evolving into a multi-billion user social network - I think it’s going to go head-to-head with Meta in the coming 5 years, in the battle for people’s time. Roblox’s latest CapEx cycle (purple line, below) hurt its financials in the short term, as elegantly summarised by the evolution of cash from operations (blue line). However, Roblox now has far more DAUs (daily active users) than in 2021, revenue (orange line) is much higher and cash from operations came in at all time highs in Q1 2025. In other words, Roblox has demonstrated the ability to reinvest capital and enhance shareholder value with free cash flow per share (next graph) now trending up.
As happened with Meta and Amazon in 2022, the market punished Roblox for reinvesting capital into the business, with the Roblox stock declining 77% from the highs in 2021 to the 2022 lows. And much like is the case with the two former companies, Roblox’s investments in the 2021-2024 period set it up to become a Singularity Scaler. As AI models gets better, Roblox’s infrastructure investments now position it to create exponentially more and better user experiences at a marginal cost, with user growth, engagement and ultimately free cash flow per share likely tracking along.
See Roblox CEO David Baszucki’s remarks during the Q1 2025 earnings call about their proprietary AI models, when it comes to enabling the creating of novel experiences:
For both Roblox engineering as well as creators on our platform, we view AI as a human acceleration tool that will allow individuals to do more. I was making the metaphor I used to use a calculator.
This is a very powerful calculator that can leverage people a lot more than a calculator.
But I do believe we'll continue both internally as well as on our creator platform to see higher quality and more output and more creative output while still having humans in the loop.
Roblox now has AI models which enable creators to prompt 3D experiences into existence and infuse non-playing characters with realistic discourse, for example (4D). As these models get better, the cost of creating new and highly realistic experiences will tend to zero which should draw far more creators and users to the platform. As the platform continues to scale, Roblox should have more data which will enable them to create better AI models for creators: which should make it increasingly harder to catch up with Roblox.
See David’s remarks about Roblox’s proprietary models:
We now have 1.5000 experiences that are playing around and experimenting within experience generative 3D AI and this is just the beginning. We have shared publicly that we're moving forward to full 3D scene creation and we're also enabling over the next few quarters what we call 4D generation.
4D generation means not just creating props and static assets, but creating native Roblox 3D immersive assets that are functional, that include embedded code. And the example there is, cars where you can walk up, open the door, hop in the car, drive the car, and get a heads-up instrument display on the car, as well as avatars and other interactive elements.
We are [also] live now with a beta of a text generation API in our system using an LLM. Creators can also use this directly in experience to power NPCs that are conversational and AI characters.
Roblox’s process power is best evidenced by two data points: it continues to successfully age up and it is growing exceptionally fast in countries with cultures that are far removed from American culture. Both show that Roblox is capable of processing information from the marketplace and converting it into product traction across demographics and geographies, which is a characteristic trait of extraordinary companies like Amazon, Netflix and Spotify. Users over the age of 13 accounted for 58.4% of all users in Q2 2023 and for over 62% in Q1 2025, up from 44.1% in Q2 2020. In turn, DAUs in Japan grew 48% YoY and 77% YoY in India.
One of my concerns earlier on with Roblox was whether they would fail to retain users as they grew up and Q1 2025 considerably mitigates this fear. What’s even more interesting is Roblox is managing to age up its user base while exhibiting operating leverage: operating expenses as a % of revenue have come down from 67.38% in Q3 2022 to 52.31% in Q1 2025, even though revenue is much higher. Margins are up because once again, Roblox has exhibited world class process power.
It’s taken Roblox a long time to hit just under 100M DAUs, but I believe it won’t take long for them to hit 300M and then over 1,000M DAUs. Roblox has discretely come to be by quietly iterating on its platform for a long time and guided by user feedback. Per the Q1 2025 earnings call, this “engine” seems to be intact, with management thinking long term and positioning Roblox to become a place where people shop, for example. See David’s remarks during the Q1 2025 earnings call about the deal with Shopify:
I think it's augmentative and important at the same time. It's part of a vision not just of getting to 10% of the gaming space but ultimately getting to 1 billion daily active users on the platform.
10% of gaming market gets them 300M DAUs: And we've shared that as we move to 10% of the gaming space on the platform we roughly estimate that could be around 300 million daily actives. Our goal is 1 billion.
And as we go to 1 billion, we do believe, in addition to the physical shopping that we do, the 2D shopping we do by ourselves, the fun that we've seen in a lot of fashion and clothing-oriented experiences on the platform will continue to expand to the purchase of physical items as part of that.
As further proof of its process power, Roblox is announcing new initiatives every quarter in order to deliver more value per dollar spent to stakeholders of the platform. In Q1 2025 Roblox released an automatic price optimisation mechanism for game passes, which has already increase median creator earnings by an outstanding 4%. According to management, it increases bookings per every hour users spend on the platform. What’s fascinating is the feature brought prices down: benefitting users and yielding more revenue for creators.
See David’s remarks about this during the Q1 2025 earnings call:
Also, the inexperienced price optimization that we rolled out is giving us roughly 4% more in median creator earnings for creators who are participating.
We're now at 35% of top 100 experiences by spending using price optimization.
We've seen some experiences do as well as 15% improvement in earnings, including [indiscernible] and really satisfying thing here. When we started running this optimizer, prices went down, not up, which is really just a great testament for helping creators find more revenue in a really an engagement and spending positive way.
This sort of constant iteration projected over a decade is what I believe takes Roblox to billions of DAUs. And I also expect operating leverage to rise exponentially during this time driven by AI, which will make it easier for creators to bring extraordinary experiences to end users and for Roblox to facilitate the environment for stakeholders to obtain more value per dollar spent over time.
Further, Roblox’s creators beyond the top 10 are now doing much better than previously: the top 11-50 experiences grew at over 100% in Q1 2025, versus just 5% a year ago. The top 100 are also doing better on average, earning $6.7 million on average in the last 12 months, which is up 35% YoY. Qualitatively, you can tell this is because Roblox cares about creators deeply and is focused on helping them achieve better outcomes. As a content creator on X and Youtube myself, the lack of the transparency with their respective algorithms can be frustrating. Roblox’s move to full transparency is revealing.
See David’s remarks about this during the Q1 2025 earnings call:
We said publicly and I would say not just on Roblox, but across the industry a belief and commitment to transparency in search and discovery algorithms.
And we have started outlining how retention, engagement, monetisation, and intentional co-play are signals. We've gone so far as to make these signals available as much as possible on our analytics dashboard for creators. So transparency, but giving feedback to creators so they can see how they're doing on these signals.
We have a lot of creators of all sizes. We're trying to really drive search and discovery, not just with short-term optimisation, but factoring long-term ecosystem health, which is really long-term enterprise value, into our search and discovery and recommendation algorithms.
I believe Roblox’s ability to take care of creators and end users will take this company a long way. So long as Roblox’s culture remains at this level or higher, the odds of long term success are high. Roblox is a pristine example of the sort of company I teach folks to spot early in my Tech Stock Goldmine course. At present, I am delighted with my portfolio and with its long term prospects, but I could add Roblox to it in a concentrated manner without batting an eye. Further, Roblox is a delightful company to study and I believe doing so deeply will help me spot more winners in the future.
Until next time!
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