Fellow digital entertainment expert Netflix (NASDAQ: NFLX) consistently sees monthly churn rates of roughly 3%, which works out to an average life span per paying customer of 38 months. On the downside, the short life span of the average paying Roblox user concerns me somewhat. Roblox's delayed revenue recognition is a great example of that. When paired with great cash profits, they can also be a sign of a financial management team that knows how to take every tax deduction in the book. Low or negative earnings can be a problem. This combination of strong cash profits and much lower taxable income is a highly effective tax strategy. The company is experiencing heavy bottom-line losses due to the delayed revenue recognition, but free cash flow clocked in at $293 million across the first three quarters of 2020. User engagement and Robux orders are growing at breakneck speed. In other words, Roblox can count on massive revenue growth over the next couple of years as this year's Robux orders work their way through the revenue recognition period. At the same time, order bookings that account for the current flow of Robux purchases jumped 171% to $1.24 billion. The company collected $589 million of fully recognized revenue in the first nine months of 2020, a 68% increase from the same period in 2019. Therefore, Roblox recognizes Robux sales over the average lifetime of paying users, which currently works out to roughly 23 months. The company doesn't recognize Robux sales as revenue until the in-game buyer either spends it or converts it into actual cash. Successful developers can earn serious money by cashing in their virtual boatloads of incoming Robux. The company generates its revenue from the direct sale of Robux to users. These fees are paid in the form of Robux, an in-game currency that can be converted back into real-world dollars. Anybody can build games with the Roblox system, where the games themselves are free to play, but many designers are charging fees for in-game items, features, and other assets. Roblox, the company, owns and operates Roblox, the video game platform. So Roblox should hit Wall Street running, but will it be a good buy right away?
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