Roblox overview
Gaming is evolving
Summary
Roblox has peaked my interest somewhat over the past several months of browsing twitter. It’s clear that there is a tonne of hype behind this gaming platform, however the company seem to leave people divided. Is it the gaming platform of the future, or a fad for young kids?
As the company have not yet gone public, it’s tricky to say whether this should be a buy or not - however it’s an exciting concept with insane growth potential and reach. It should absolutely be looked at closely in the near future (post IPO/Direct offering).
What is Roblox?
The company
Founded in 2006, Roblox is a video game platform where anyone can develop games to be played by other users of the platform. The games themselves are free to play, however oftentimes the players within the game will be able to purchase in-game items using the in-game currency – ‘Robux’.
Taken straight from their recent S1 filing – “An average of 36.2 million people from around the world come to Roblox every day to connect with friends. Together they play, learn, communicate, explore, and expand their friendships, all in 3D digital worlds that are entirely user-generated, built by our community of nearly 7 million active developers”.
Developers of Roblox don’t make any specific games on their app – it’s all user-driven. Roblox are not in the business of developing games, but rather they have created a ‘game engine’ allowing everyone the opportunity to create and share their own ideas.
At a glance, it may seem like the majority of the content on the site is mediocre at best, however below is a quote from Matthew Ball who eloquently outlines why this model works…
“Of course, most of these creations are mediocre and are never played. However, focusing on the raw, let alone average quality is to miss the point (for what it’s worth, 20% of Spotify’s library has never been played). The experiences users create don’t need to be “great” or polished to be popular (what makes GTA fun certainly isn’t its last-gen graphics or physics). These user created experiences also don’t need to be popular for their creators to take pleasure in the act of creation. And to this end, it’s important to recognize how expansive the creation process can be. Many games are run by a collective where individual participants are responsible for developing art, designing a world, managing the community, and so on. This sense of personal investment and shared ownership is profoundly sticky and meaningful.”
How do they make money?
The business model is fairly unique in the sense that the users of the platform are what really make the platform.
Roblox as a company allow User generated content to be created on the platform via independent developers.
Players can purchase in-game currency called ‘Robux’ which equates to $0.01 per Robux.
Users then play the games created by other users and purchase in-game items with their Robux.
The proceeds are split between Roblox and the independent developers.
Developers can continue to use these ‘earned’ Robux within the platform, or they can choose to cash it in for real money ($0.0035 per Robux).
Roblox earns a margin between the $0.01 and $0.0035.
The global gaming market
Market Research
Mordor Intelligence estimates the gaming market to be worth $162.32 billion in 2020 and expected to reach $295.63 by 2026 (CAGR of 10.5%).
Grand View Research estimates the video game market to be $151.06 billion in 2019 and expect it to grow to $353.2 billion by 2026 (CAGR of 12.9%)
Research and Markets value the 2019 gaming market at $151.55 billion and predict a value of $256.97 billion by 2025 at a CAGR of 9.17%
In my opinion the potential market size of the gaming market is huge, and only getting bigger. I’ll likely make this point again in future articles, but I strongly believe gaming to be sorely undervalued with regards to its potential over the next 5 to 10 years. This is taken directly from my ‘2021 Trends’ article, which highlights my point.
“I think the video gaming industry is slowly morphing into something significantly different compared to the past 20 years.
Games are beginning to turn into a sort-of SaaS model compared to past business models. It’s no longer the case you just buy a game and that’s the end of your purchasing within that game. Models pioneered by companies like EPIC now see free base games with multiple season-long subscriptions. There is in-game content and a whole host of more ways to monetise the experience once you are hooked to the core game. So a single game can become a recurring revenue mechanism – which was never possible in the past.
Games are the future of social networking. This is something we’re beginning to see with games like fortnite who are putting on in-game ‘concerts’ where people can view a performance live with their friends within a game. Given time, it’s not hard to imagine the next social networking platform looking more interactive and ‘game-like’, rather than scrolling and liking pictures.”
According to some reports, more than 50% of kids 9-12 play Minecraft or Roblox in markets such as the USA, Canada and Australia.
Roblox estimates 4 billion hours per month by 2023
50 Million games made on Roblox Studio
5000 of which have over 1 million plays
1000 have hit 10,000 concurrent players
10 have more than 1 billion plays
The Roblox company could not have built this type of product offering internally.
150 million Monthly Active Users in July 2020
Last year Roblox paid out $100million to developers against a backdrop of over $500m in user generated content revenue.
Innovation
There are several interesting aspects of the Roblox model which makes them stand out from other gaming platforms.
Metaverse
The idea of a ‘metaverse’ (“a collective virtual shared space, created by the convergence of virtually enhanced physical reality and physically persistant virtual space, including the sum of all virtual worlds, augmented reality, and the internet”) isn’t something new. The idea has been explored in works of fiction like ‘ready player one’. Roblox is a company beginning to explore this idea, even though it’s in relatively early stages.
User Generated content.
Part of the uniqueness here also lies in the business model. The sole reliance on the users to create, develop and monetize the games on the platform is like nothing else out there. It is popular (to say the least). However, it will be interesting to see if this model stands up to the test of time.
Organic growth
Similar to the point above – it’s all down to the user. It’s even down to the user to market the game in order to get people playing the game.
It’s an interesting model, and one that’s not easy to imitate.
Financials
Let’s take a quick look at the financials for the first 3 quarters of 2020. It’s a mixed outlook here for Roblox – as revenues have increased significantly (+68%), losses have widened (almost 4x).
This is mainly due to the outgoing payments to content developers (209 million in 2020 compared to 72 million in 2019) and admin fees connected with the run up to the IPO (65 million in 2020 up from 29 million in 2019).
Performance
Revenue grew 68% from $349.9 million in the nine months ended September 30, 2019 to $588.7 million in the nine months ended September 30, 2020.
Bookings (“sales of our virtual currency which we record as deferred revenue and then recognize that revenue over the estimated average lifetime of a paying user”) grew 171% from $458.0 million in the nine months ended September 30, 2019 to $1,240.2 million in the nine months ended September 30, 2020.
Net Loss grew in the first 9 months of 2020 to $203.2 million, from $46.3 million in 2019.
The finances are a little more complex than at first glance due to the way in which money is spent on the platform – hence the made up term ‘bookings’. However this can be argued as a positive for Roblox, as cash-flow wise as they receive the entirety of the cash upfront whilst the user spends the Robux over a period of time.
This model positively affects the Free-cash-flow position of the company which (as of 30th sept 2020) sits at $292.6 million, compared to $6 million for the same 9 month period in 2019.
IPO
Roblox was planning to list shares on the NYSE in Q4 2020, however in an SEC filing on Jan. 8, the company changed its plans to a ‘Direct Listing’ (similar to that of Slack and Spotify). A direct listing has it’s own unique risks compared to an IPO, however is a much simpler process. This is predicted to happen at some point in February.
A funding round earlier this month put Roblox’s valuation at $29.5 billion, up from just $4 billion almost a year ago.
Earlier this month, Roblox raised $520 million in a funding round led by Altimeter Capital and Dragoneer Investment Group.
Conclusion
Overall, I’m very interested in this one.
Roblox have a unique business model, offering solid infrastructure for amateur and professional developers to create and build an audience/source of income. Secondly, the company are essentially pioneering the new-wave of experiencing gaming – exploring the idea of the metaverse in a social context. Lastly, there is plenty of room for the company to grow in this evolving market, where Roblox already have a strong (though young) user base.
However, this is by no means a sure bet. The company’s losses are increasing, it’s tricky to see how they expand their user base to cover an older demographic (with more purchasing power), and the industry may easily evolve in the opposite direction of Roblox’s vision.
However, that being said – the potential upside here could be huge if the Roblox platform ends up being the social gaming platform of the future.
I’m tempted to enter a small stake whenever the company decide to IPO. However it will likely only be a starter position, as I want to see more from the financials and user engagement metrics over the next year in order to get a taste for where this trend is heading – especially post-pandemic as the pandemic has significantly boosted traction for the platform.
Cheers,
Innovestor