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Roblox (RBLX) is the “go-to” gaming, entertainment, and socialization platform for the youth (<16 y/o) demographic in North America and Europe. Roblox is a highly attractive asset with a massive user base (150M+ MAUs), significant long-term potential, optionality in the growing prevalence of the “metaverse”, multiple growth levers to pull, and attractive user economics driving a reasonably robust financial profile. The broad-based tech pullback presents a great risk/reward point for RBLX.

Company Overview

Roblox is a gaming and social entertainment platform where individuals can design, build, or play games. Users create their own avatars and play any number of thousands of games that are all created by other players. RBLX is more than a game, but rather an entire ecosystem where creators (user developers) build games and experiences on RBLX’s creative engine and upload them to the RBLX platform for users to play. It manifests itself into a 3D `universe’ where people can gather, game, and socialize.

The RBLX infrastructure consists of three pillars:

  • Roblox Client: the application that allows users to play the games
  • Roblox Studio: the toolset that enables creators and developers to build, publish, and operate games and experiences that other users can access in the game client. It requires little to no code to develop a game.
  • Roblox Cloud: the services and infrastructure that support and power the platform

Roblox studio screen for game development

Roblox Studio Example (WikiHow)

Roblox experience with individuals skateboarding in Vansworld

Roblox Experience Example (Vansworld)

While most users enter the platform as gamers, the platform has expanded to become a hub for social interaction where users can watch concerts, movies, or socialize.

Roblox’s mission is to build a human co-experience platform that enables shared experiences among billions of users. Every day, tens of millions of people around the world have fun with friends as they explore millions of immersive digital experiences. All of these experiences are built by the Roblox community, made up of millions of creators. We believe in building a safe, civil, and diverse community—one that inspires and fosters creativity and positive relationships between people around the world.

(Roblox Reports November 2021 Key Metrics).

Business Model

Roblox primarily earns revenue via the sale of their virtual currency, “Robux”, to users. Here is a quick breakdown of how Robux works from both the developer and user perspective:

  • Developers create and publish games to the platform which either offer cosmetic items for sale within their game or have some aspect of a typical pay-to-play game, where users must pay to progress in their journey.
  • Users of the game exchange real-world currencies for Robux and spend these Robux on such items/expansions.
  • Roblox takes their cut of the transaction, pays the app stores, and gives the rest to the developers.
  • The developers can exchange the Robux for real-world currencies.

Investment Thesis

Roblox is an attractive asset. There is significant long-term potential due to the following factors of their business model paired with the relatively attractive current entry point due to a non-fundamental pullback.

  1. It is a unique and large ecosystem with strong network effects.
  2. Disrupts the typical video game value chain turning users into creators and decentralizing production.
  3. Numerous growth avenues to expand the user base and monetization
  4. Optionality beyond gaming and into the “metaverse” — or virtual universe

Ecosystem, Network Effects, and the Roblox Flywheel

Roblox has built a tremendous platform with over 150 million monthly active users (MAUs) and is the first choice of entertainment and social interaction for the entire generation of children and adolescents in North America and Europe. The sheer scale of users on Roblox spins their flywheel where the number of users attracts developers to design engaging content which in turn attracts more users and higher monetization potential. Below is an illustration of how this virtuous cycle works:

A depiction of how Roblox spins a flywheel

Roblox Flywheel (Created by user)

Inspired by this article by Scott Galloway

The installed base of users is sticky via both the inherently social nature of the platform and money spent on the platform to unlock games or outfit their avatars which disincentivizes exploring other platforms and reinforces the competitive moat. We can see this through their impressive daily active user growth.

RBLX: Daily active users chart

Roblox Daily Active Users (Roblox Investor Presentation)

On the point of avatars, Roblox is centered around user identity via their created avatars. All users on Roblox have a unique identity that allows for individual expression and these avatars transcend any individual game as the user avatar is used across all games in the Roblox universe.

Roblox avatar customization screen

Roblox Avatar Customization (Roblox)

Decentralized Game and Experience Production

As previously mentioned, Roblox’s games and experiences are user-generated content (UGC). Roblox empowers its users to become developers/creators by providing them with the tools to do so through Roblox Studio and supporting the back-end on Roblox Cloud.

In traditional video game production and R&D, the capital is spent upfront and costs can be exceptionally high (“AAA” games can cost $100M+, ex. Cyberpunk 2077 had a budget of $300M) and there is no certainty of success and constant unpredictability of community perception. For Roblox, they “outsource” their game production to millions of eager developers and pay for only successful content. Essentially, RBLX being based on UGC continuously feeds the platform while de-risking the development process and solving for launch risk and franchise fatigue that “AAA” games face.

Examples of RBLX games: Adopt Me! (17bn visits), Tower of Hell (7bn visits), Welcome to Bloxburg (4bn visits).

Growth Avenues Expanding User Base and Increasing Monetization

Roblox has grown tremendously and has a significant presence in their core market (8-12 yr olds in western markets). There are numerous levers to be pulled by management to continue top-line growth.

  1. Expand user base in international markets. Roblox is highly penetrated in western/English-speaking markets. International expansion has seen early indications of success (2-3x user growth in Japan and Korea). The Chinese market is not served by RBLX. Could represent 50-100m new MAUs via Tencent license.
  2. Increase appeal to older audiences. ~50% of daily-active users are <12 y/o so there is significant upside in capturing older audiences. Continued investment in the platform and development of sophisticated games could attract this audience. There is early evidence of success as Roblox has improved its sophistication with the 13 and older audience growing at ~70% vs. 50% of the 13 and under audience on average over the last three years.
  3. Increase monetization. Increasing importance of digital identity should lead to increased spending. Working with developers to better monetize content for mutual benefit. Grow subscription offerings via Roblox premium. Roblox increasingly working with corporate sponsors to add branded content to the game (Nike, Gucci, LVMH, North Face/Vans, etc.). There is a significant incentive for consumer brands such as these to work with Roblox as the lifetime value of these young consumers is high. From Roblox’s November 2021 Investor Day, they explain how every company will have a Roblox strategy in the future.
  4. Expanded platform use and improved functionality. Continued expansion beyond gaming into social, entertainment, learning, e-commerce, and broadly more human co-experiences. An example would be the virtual concerts that are being held on the RBLX platform. Experiences become increasingly engaging and less distinguishable from real-world experiences (examples include: 3D spatial audio implementation, high fidelity avatars, etc.)

The Leader in the Emerging “Metaverse”

Roblox is a social destination. Players stay connected and share experiences with friends. Expanding these virtual experiences will reduce the traditional barriers between games, social entertainment, and commerce. The idea of a “metaverse” is not a new idea, but with powerful and accessible consumer devices, high-speed connections, and cloud computing the concept of the metaverse can be enabled by the right platform. As mentioned above, the continued improvement of the Roblox platform will bring engaging experiences that mirror real life.

On the front of commerce, Roblox’s VP of Marketing explains how “whether you’re a sports franchise, a fashion brand, movie studio, or musical artist, there are endless possibilities for authentic and immersive experiences that bring your brand to life”.

Evidence of Metaverse infancy can be seen in events like the Lil Nas X concert (33 million views), community events, and e-commerce and branding through Nikeland, Vans World, etc.

Financials Discussion

Revenue

RBLX: bar graph histogram of revenue

Roblox Revenue (Roblox Investor Presentation)

Roblox has experienced exceptional revenue growth, especially in the last couple of years. Revenue has been primarily driven by the increase in active users on the Roblox platform. Exceptional growth noted in Q2 2021 is very positive as this was our first attempt in North America to return to normalcy, but Roblox growth was sustained.

It is important to call out RBLX’s unique approach to revenue recognition though.

Bookings and Roblox Revenue Recognition

When money has been exchanged for Robux (RBLX virtual currency), that is recorded as “bookings”. Revenue is then recognized when the Robux is exchanged for virtual goods and depending on the type of virtual good, there is a different revenue recognition schedule. Items in the Roblox ecosystem can either be “durable”, think clothing for the avatar, or “consumable”, think temporary boosts, Durable items are recognized over a 24-month period whereas consumables are recognized as revenue as soon as they are purchased. ~90% of Robux spent on the platform is on “durable” goods, so 90% of Robux spent is recognized over a 24-month period. This is an important thing to note as we look at Roblox’s bookings, or total conversion of real money to Robux.

RBLX: Bookings bar graph

Roblox Bookings (Roblox Investor Presentation)

Costs

Costs and expenses can be delineated into cost of revenue, which primarily consists of third-party payment processing fees, developer fees, which is the amount earned by developers and creators, personnel costs, infrastructure, trust, and safety costs in addition to other operating expenses which are primarily R&D and SG&A. The following is a breakdown of those costs as a % of revenue, of which we can see some scale taking place on some of the line items: G&A, S&M, infrastructure, and R&D.

RBLX: Cost as a percent of revenue

Roblox Costs (Roblox Filings)

Free Cash Flow

RBLX has greatly accelerated their free cash flow generation over the last two years. Free cash flow in the below table is fairly standard cash flow from operations minus capital expenditures and acquisition of intangible assets. It is positive to see the potential of RBLX’s free cash flow generation with an early indicator of success over the past 6-7 quarters.

RBLX: Free cash flow chart

Roblox Free Cash Flow (Roblox Investor Presentation)

Valuation Considerations

Roblox is not exceptionally cheap. However, we are not buying Roblox for the near-term potential, but how it will capture and monetize youth attention. Technology companies recently have broadly pulled back which puts Roblox at a relatively attractive entry point near its IPO point. While Roblox is an expensive stock, the recent pullback and long-term potential make it an incredible value proposition. Currently, RBLX trades at around 11x forward sales and ~50x EBITDA.

Comparable Companies

It is difficult to ascertain a list of truly comparable companies with Roblox. Rather, Roblox is a combination of gaming, socialization, and an outlet for creativity. It’s ability to capture youth attention is invaluable and we can look through comparable companies in a sense to understand what a “gaming”, or “social” company is worth in isolation.

RBLX: comparable companies analysis

Roblox Comparable Companies Analysis (Author’s Calculations)

Summary of Thesis

Roblox is a unique and highly attractive company. The current environment presents an opportunity to buy the future of youth attention with metaverse optionality. Here’s a summary of the thesis:

  • A large and unique ecosystem with network effects. Go-to form of entertainment and social interaction for an entire generation of users (16 and under). Scale forms a flywheel where users become developers that create content that attracts new users.
  • Disrupting game development. RBLX outsources content production to its millions of users and only pays for successful content. Focus on UGC de-risks development and provides a broader more diverse content library without significant capital outlay on R&D.
  • Multiple levers to drive future growth. RBLX invests in platform functionality, the addressable market can grow by adding more sophisticated games/developers. Additionally, RBLX can expand into international markets, increase monetization, and expand functionality beyond games and into human co-experiences
  • Attractive financial profile. Combination of high growth, high margins, and cash flow generation. Growth accelerated by COVID-19 is expected to be relatively sticky due to user adoption and continue into the future.
  • RBLX can provide a virtual universe, or “metaverse”. RBLX can continue to build on the virtual universe with the inclusion of entertainment, community, and e-commerce experiences.

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