RBLX - Roblox Could Be The Next Big Social Networking Platform

2023-12-04 03:02:41 ET

Summary

• Roblox is an online platform for user-generated video games, offering cross-platform play and social features.
• The company generates revenue through the sale of virtual currency, game monetization, advertisements, and premium subscriptions.
• RBLX has seen growth in international markets and is expanding its social and creative features, positioning itself as a hybrid gaming and social networking platform.

Roblox ( RBLX ) is an online platform and creation system that allows people to develop and play video games created by other users.

When you create an account with Roblox, you then enter into their platform and select the game you want to play. Games are categorized based on Most Engaging, Recommended for You, Exclusive to those aged 17+, ones for Learning, ones for Roleplay, and so on.

Founded in 2004 and officially launched in 2006, it has grown to become one of the most popular platforms for user-generated content in the gaming world. Here's an overview of what Roblox does:

1. User-Generated Games : Roblox's primary feature is its vast array of user-created games. Users can create their own games using the Roblox Studio, a software tool that offers a wide range of customization and programming options, powered by the scripting language Lua.

2. Cross-Platform Play : Roblox supports cross-platform play, allowing users to play games with friends across different devices, including PC, mobile (iOS and Android), and game consoles like Xbox.

3. Community and Social Features : The platform also functions as a social media site where users can add friends, join groups, chat, and have a social gaming experience.

4. Virtual Economy : Roblox has its own virtual currency, known as Robux, which can be used to purchase in-game upgrades or avatar accessories. Users can also earn Robux through game creation and monetization.

5. Education and Learning : Roblox is used as an educational tool to teach children coding, game design, and entrepreneurial skills. The company provides resources for educators and runs programs aimed at making game development and coding accessible to young people.

6. Safety and Moderation : Roblox places a strong emphasis on safety and moderation, especially given its young user base. The platform has various safety features and guidelines to protect its users, particularly children, from inappropriate content or interactions.

Roblox is more than just a gaming platform; it's a comprehensive environment for creativity, social interaction, and learning.

Roblox Create is incredibly immersive and surprisingly easy to learn.

Roblox Business Model

Roblox generates revenue primarily through the following methods:

1. Sale of Robux : Roblox's virtual currency, Robux, is the main source of revenue. Users purchase Robux with real money, which can then be used in various ways within the platform, such as buying in-game items, accessories for avatars, or accessing certain games.

2. Game Monetization : Developers who create games on Roblox can monetize their creations. They can charge users to play their games or sell in-game items, upgrades, or subscriptions, earning a portion of the revenue in Robux. Developers can then exchange Robux for real-world currency through the Developer Exchange program (DevEx).

3. Advertisements and Sponsorships : While not as significant as other sources, Roblox also earns revenue through advertising and brand partnerships. This includes immersive, interactive brand experiences within the platform and sponsored content.

4. Premium Subscriptions : Roblox offers a subscription service called Roblox Premium, which provides members with a monthly Robux allowance and other benefits, such as access to premium-only levels, items, or special discounts.

One thing to be mindful of when looking at the company is in its quarterly reports, Roblox discloses its bookings total each quarter. The company believes that bookings are more reflective of its business than revenues. If you look at the financials, you will notice the two don't match up. According to Roblox:

Bookings is defined as revenue plus the change in deferred revenue during the period and other non-cash adjustments. Substantially all of our bookings are generated from sales of virtual currency, which can be converted to virtual items on the Roblox Platform. Sales of virtual currency reflected as bookings include one-time purchases and monthly subscriptions purchased via payment processors or through prepaid cards. Bookings also include an insignificant amount from advertising and licensing arrangements. We believe bookings provide a timelier indication of trends in our operating results that are not necessarily reflected in our revenue as a result of the fact that we recognize the majority of revenue over the estimated average lifetime of a paying user.

Source: Roblox Investor Relations

The company was a huge beneficiary of Covid. As kids stayed at home during Covid and attended schools remotely, they used Roblox significantly more. When schools reopened again in 2021 and 2022, RBLX suffered.

The graph below shows the dip in revenues around the time when everything started reopening after Covid.

Roblox has been dogged by its cash burn. Viewed as yet another tech company that has been overspending to grow without any line of sight to profitability, the stock got punished when rates rose dramatically in 2022.

From peak to trough, RBLX was down 86% from 2021 to 2022. it has since risen moderately to roughly $40, still down 73% from its all-time highs in 2021.

However, the latest results from Q3 2023 suggest that the business is more than just a Covid beneficiary:

• Average daily active users (DAUs) hit a new milestone at 70.2 million, up 20% year-over-year
• Hours engaged (Hours) exceeded 16 billion, up 20% year-over-year;

Investors responded favorably, sending shares up from the low $30's to around $40. Commentary in earnings press release got investors excited and for good reason. The era of heavy cash losses appears to be over:

For the foreseeable future, we expect to target operating costs in aggregate to grow generally at or slower than the rate of bookings growth and we expect capital expenditures to be meaningfully lower in 2024 and 2025 than over the past two years. We have sufficient core data center capacity for now, and believe our infrastructure-related capital expenditures will be less than $100 million in 2024. In addition, we expect to spend approximately $80 million on tenant improvements on our new campus in San Mateo. These figures are down significantly from $426.2 million in 2022 and $255.5 million in the first three quarters of 2023. As a result, we expect to continue generating free cash flow in Q4 2023 and for 2024 .

Source: Roblox Q3 2023 earnings release

Growth Overseas

While domestic revenue growth in the USA remains healthy at +34%, Roblox is really starting to crank internationally. In Q3 2023, revenues in the rest of the world were up 49%. Revenues from Asia Pacific are up from $19 Million in Q3 2020 to $74 Million in Q3 2023, a 289% increase or 57% CAGR.

Roblox as a Social Network

Roblox can be considered a social network in addition to being a gaming platform. While its primary focus is on gaming and user-generated content, it has several features that give it the characteristics of a social network:

1. Social Interaction : Users on Roblox can add friends, join groups, chat, send private messages, and interact in a multiplayer gaming environment. This allows for the creation of communities and social interactions among users.

2. User-Created Spaces : Just like traditional social media platforms where users create and share content, Roblox allows users to create their own games and environments. These spaces often become venues for social interaction and community building.

3. Events and Experiences : Roblox hosts virtual events and experiences, some of which are social or collaborative in nature, further encouraging community engagement.

4. Safety and Moderation : Given its young user base, Roblox includes social network-like safety features and moderation, focusing on creating a safe environment for interaction, much like social media platforms do.

While gaming remains its core offering, these social features position Roblox as a hybrid platform where gaming and social networking converge, especially appealing to younger audiences.

Roblox has launched several new tools and features recently to enhance its social and creative aspects.

Enhanced Avatar Customization : Roblox introduced new tools for avatar creation and customization , which include new mesh and texture APIs that give creators control over changing items inside an experience. They allow people to customize avatars directly within the experience, like adding freckles or changing the shape of the jaw. These enhancements make avatar creation more accessible and varied, allowing for a more personalized and social experience on the platform??.

Roblox Connect : This is a new feature for real-time social interaction, where users can call each other as their avatars in a shared experience. This feature transports users to a shared virtual space for conversations, enhancing the social experience on Roblox??.

Expansion to New Platforms : Roblox expanded to new devices, including Meta Quest and PlayStation, which enables a much larger audience to access Roblox experiences, thus increasing the opportunities for social interaction and community building across more platforms??.

New Tools for Roblox Developers

Conversational AI - Assistant : Roblox announced the introduction of "Assistant," a conversational AI that will make creation on Roblox easier for developers. This AI tool is aimed at helping creators build more engaging and rich experiences faster.

Subscription Models for Creators : Roblox will launch a feature that allows creators to offer subscriptions within their experiences. This model provides creators with the freedom to choose which features or offerings to include in their subscription plans, like exclusive content or experiences. This will provide creators with the opportunity to generate more revenue and thus keep them more willing to develop for Roblox, increasing the power of the network effects of Roblox, something I wrote about way back in 2012.

Financials & Valuation

Roblox is still operating at a GAAP loss; however, as I mentioned above, the company is now generating positive free cash flow and expects to do so going forward.

Because the company is still in its nascency in my opinion, I think it's best to value it on a price to sales basis. The company guided for revenues of roughly $4 to $4.05 Billion for 2024. At a $25 Billion valuation, the company is trading at roughly 6.2X this year's sales.

Roblox is guiding for 20%+ revenue growth from now until 2027. Assuming a 20% growth rate, revenues should hit roughly $8.3 to $9 Billion in 2027. The company operates at a healthy 77% gross margin, which has actually expanded 300 bp since 2020.

I think the company has the potential to become a major social networking platform like Meta ( META ) and Tencent ( TCEHY ) and it enjoys similar gross margins as those two companies. Both of those companies operate at 25-35% net margins.

As Roblox matures and eclipses the $10 Billion revenue market toward the back half of this decade, I think it's reasonable for it assume it will be doing $2.5 to $3.5 Billion free cash flow per year.

META has traded around 25 to 40X FCF on average. Assuming Roblox trades at similar valuations, it should be able to get up to a valuation of $75 Billion to $150 Billion, depending on what valuation the market places during euphoric times.

If we discount that back to present day using a 10% discount rate, we are looking at compounded growth rates of 20% to 40% per year.

Risks & Uncertainties

The biggest risk related to Roblox is that it is not operating at a GAAP net profit. It has switched to positive free cash flow, which is encouraging.

The other risk is that as a platform popular with children using it, Roblox must continuously invest in and improve its safety measures and content moderation to protect its young user base from inappropriate content, online predators, and cyberbullying.

Conclusion

Given the recent trends toward sustained positive free cash flow and what looks to be a platform that is expanding rapidly worldwide, with healthy gross margins near 80%, and significant network effects, I think Roblox should be a core position for people looking to have exposure to social networking and gaming.

I can fairly easily see a path to 20%+ CAGR over the next 5 years. I'm long RBLX as a result.

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