Roblox Looks to Gain Leverage on Expenses as Growth Reaccelerates  

Senior Equity Analyst

Neil Macker

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Roblox operates an online video game platform that lets gamers create, develop, and monetize games for other players. The firm offers its developers a hybrid of a game engine, publishing platform, online hosting and services, marketplace with payment processing, and social network. Unlike a full-priced AAA title, there is no entry cost to try out Roblox or the vast majority of user-developed games. Thus, to drive booking growth and keep the Roblox model churning along, the new user must purchase and spend Robux, the platform’s tender. 

Roblox heavily benefited from the stay-at-home restrictions at the start of pandemic with very impressive top-line growth, even more so than its video game peers. It expanded its user base from 19.1 million daily active users, or DAUs, in fourth-quarter 2019 to 65 million in the second quarter of 2023. We project that the combination of popular games and large userbase will attract more users. Additionally, we expect that the firm will be able to further increase its penetration in non-U.S. markets. As a result, we expect that the growth will be slower than during the pandemic but that DAUs will exceed 108 million in 2027. 

The platform was also successful in driving quarterly bookings per DAU up from $12.37 to $15.40 by the second quarter of 2021. While Roblox’s DAUs grew faster outside of the U.S. during the pandemic, the firm is still leveraged to its domestic market as it generated 68% of 2020 bookings--despite only representing 33% of DAU in 2020. We expect this gap to shrink over the next decade as Roblox improves its penetration in post-industrial countries in Europe and East Asia. However, growth in. bookings per DAU has been and will continue to be slowed down by Roblox's further expansion into emerging markets where many young users will likely have even less access to disposable income. 

Longer-term, we assume the firm continues to invest in adding new features to help keep both developers and teenage gamers engaged with the Roblox platform While an all-encompassing metaverse may be very far from realization, we think that Roblox's steps toward a metaverse will help the platform hold on to users and developers as they age.

Business Strategy & Outlook

We assign Roblox a narrow moat rating derived from the network effect. The Roblox platform consists of three separate pieces that work together. The first is the Roblox Client, which players use on PCs, Android, iOS, and Xbox One to play games, connect and chat with friends, and make purchases. Roblox Studio, the second piece, is the development environment for users to create, publish, and operate their games. The final piece is Roblox Cloud, the infrastructure for both online games and development. 

Roblox doesn’t generates revenue from the sale of the Roblox client, games, or server space but via in-game transactions, avatar cosmetics, private servers, subscriptions, premium development plugins, and advertising for developers. All of these transactions are done in Robux, the Roblox currency that can be purchased at multiple price points with an effective exchange rate in the U.S. from $0.0125 per Robux (400 Robux for $5) to $0.01 per Robux (10,000 Robux for $100). Users can subscribe to monthly premium plans to lower the exchange rate to $0.0091. Roughly 90% of Robux are spent within three days of being purchased but the revenue for durable virtual goods is recognized over the life of the player (assumed to be 23 months under GAAP accounting). This difference accounts for the divergence between GAAP revenue versus bookings (the actual amount of Robux purchased in a quarter or year), which can be particularly glaring during high growth periods like 2020 when bookings were over 100% above GAAP revenue. 

Robux spent in games is split among three groups--app stores and payment processors (24%), developers (27%--25% based on transactions and 2% based on time spent in game by Premium subscribers), and Roblox (49%, further broken down to 14% for hosting and support, 9% for platform investment, and 26% as Roblox’s share). Developers receive payment in Robux, not local government currency. The developer can either use the Robux to buy development plugins, bid for advertising for their game within other games, or use the Robux to buy other games. If a developer in the U.S. wants to convert her Robux into dollars, the exchange rate back into fiat currency is $0.0035 per Robux but a developer must exchange at least 100,000 Robux ($350) to qualify. This relatively high minimum and unfavorable exchange rate mean that the vast majority of developers do not cash out their Robux. 

In 2020, Roblox paid out $329 million to 4,300 developers, up sharply from $112 million in payouts to 2,600 developers the year before. However, bookings for Roblox in 2020 hit $1.88 billion, up from $694 million in 2019, and there were roughly 1.27 million developers active in 2020. While most developers created games that generated limited playtime, over 18,200 games were played for more than 10,000 hours in 2020 but only 1,287 developers made over $10,000 in developer exchange fees, with only 305 over $100,000. 

Roblox’s network effect moat source derives from its unique business model. By providing a game engine, tools, and servers along with monetization opportunities, Roblox offers a tempting starting point for young gamers who are interested in creating games with a relatively simple to use game engine along with a robust set of tools and tutorials. The library of user-developed games attracts more young players who spend money in-game. The growing user base along with the ability to monetize games entices more developers from not only the current player base but also experienced developers and brands/celebrities looking to market to younger users. Examples of the brands and entertainers using the Roblox metaverse include Netflix, which launched games around its Stranger Things franchise, and Lil Nas X, who hosted three concerts in November 2020 on the platform. Additionally, the social aspect of the Roblox Client helps to reinforce the networks as the relatively young players entice their friends to join Roblox and play the games together. Players can use Robux to create a private server to ensure that that their friends and themselves can play an instance of a specific game. 

Like its peers in the video game industry, the pandemic accelerated both Roblox’s growth and the strength of its network effect. The company had 10.3 million daily average users in the first quarter of 2018 that grew to 19.1 million in the fourth quarter of 2019. Lockdown restrictions along with younger users needing new outlets to connect with friends helped to drive DAUs to 43 million in the second quarter of 2021. While the expansion of the user base is likely somewhat of a pull forward in demand, we do think it demonstrates how the network effect could continue to drive long-term growth. 

The firm also benefited on the booking side as average quarterly bookings per DAU jumped from $11.62 in the first quarter of 2018 to $15.40 in the second quarter of 2021, with a peak of $17.31 in the fourth quarter of 2020. The ability to grow bookings per DAU while massively expanding the user base in a highly competitive video game landscape reveals the strength of the network effect moat source.

Narrow

Economic Moat

Roblox

Roblox Corp. engages in the provision of online gaming services. Its platform consists of Roblox Client, Roblox Studio, and Roblox Cloud. Roblox Client is an application that allows users to explore 3D digital worlds. Roblox Studio is the toolset that allows developers and creators to build, publish, and operate 3D experiences and other content accessed with Roblox Client. Roblox Cloud includes the services and infrastructure that power the human co-experience platforms. The company was founded by Erik Cassel and David B. Baszucki in March 2004 and is headquartered in San Mateo, CA.

Earnings data Q4 2023

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In August 1989, David Baszucki started a company called Knowledge Revolution which made educational physics and mechanical software. He created a 2D simulated physics lab called Interactive Physics, enjoyed by students around world. During this time he hired his first employee, Erik Cassel, who would go on to form Roblox with him. 

David and Erik launch the beta version of Roblox, DynaBlocks, in order to scale the creativity and imagination of their former company.

The company raises $560,000 of Series A funding, putting the company's pre-money valuation at $1.5 million. 

After realizing people had a hard time remembering its name, the company officially changes from DynaBlocks to Roblox, and Roblox launches on September 1, 2006.

Roblox becomes compliant with COPPA by adding a safe chat feature to protect users under the age of 13.

Roblox raises $2.9 million in Series C venture funding from First Round Capital, Altos Venters and Kleiner Perkins—putting the company's pre-money valuation at $6 million. 

The company holds its first Hack Week by inviting Roblox developers to work on outside-the-box ideas to present.

An iOS version of Roblox is released, and Roblox is now mobile.

Roblox allows developers to exchange their Roblox digital currency, Robux, into real-world currency. Pays to play.

Roblox launches on Xbox One starting with 15 games.

Roblox VR for Oculus Rift launches with more than 10 million games in 3D, bringing user-generated, social gaming to virtual reality. 

Roblox closes a $92 million funding round led by Meritech Capital Partners and Index Ventures.

The company closes $150 million in Series F funding with Greylock Partners and Tiger Global Management.

Roblox forms a partnership with Chinese tech giant Tencent, by focusing on education in order to enter the Chinese market. 

Roblox reaches a major milestone by hitting 100 million active monthly users.

Roblox receives $150 million in a Series G funding round led by Andreessen Horowitz. 

In response to the global pandemic, Roblox creates "Party Place," a venue for virtual birthday parties and other meetups. 

Roblox experiences rapid revenue growth in response to continuing stay-at-home mandates.

Roblox partners with Columbia Records to host its first virtual concert featuring Lil Nas X.

The company goes public on the NYSE under the ticker symbol RBLX. Roblox now has more than 31 million daily users who use it an average of 2.6 hours per day. The company has a reported revenue of $589 million during the first nine months of 2020. 

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