RBLX--Q3 A Glimpse at the Metaverse

Investment Analysis Clubs Saul’s Investing Discussions
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A few months ago, I took a look at RBLX. I (in retrospect regrettably) didn’t pull the trigger, but I promised to follow up after Q3. Unlike some of the board favorites, RBLX knocked the quarter out of the park and I have a better sense of where they are going.

First, let’s have a quick review of the numbers:


Last 4 quarters:

**Quarter      2020Q4   2021Q1   2021Q2   2021Q3**
Revenue        $310     $387     $454     $509
YOY Growth%    110%     139%     127%     102%
QOQ Growth%     23%      25%      17%      12%

DAU*           37.1     42.1     43.2     47.3
YOY Growth%     94%      78%      29%      31%
QOQ Growth%      2%      13%       3%       9%

Bookings/DAU $17.30   $15.48   $15.41   $13.49

*DAU = Daily active users

At first glance, growth is slowing down. So why did the stock pop 42% after earnings were announced? First, the numbers were way better than estimates. Growth is slowing from pandemic levels but remains very high. Second, the platform is maturing is ways that should eventually bring in a lot of money.

I think I see it. They talk about the “metaverse” as a place where users can interact in a 3D virtual world. There were two stories highlighted on the conference call.

Chipotle built a Halloween event where people would visit a virtual restaurant with their avatars dressed in Chipotle inspired costumes in return for coupons for free (real) burritos.

In another event, a virtual Vans experience allowed visitors to skateboard, see new Vans merchandise, and “immerse” themselves in the brand. Management said it is a logical step to enable purchases through the platform.

My second takeaway from the call: Roblox being a low code/no code development platform allows experiences to be developed extremely quickly. When Squid Game took off on Netflix, developers on Roblox created an experience to pair with the show within days. (Hopefully the experience didn’t involve shooting losers in the head.) This rapid development cycle allows content to remain fresh and relevant.

Upside

  • There is a huge runway. There are 3 billion gamers worldwide, so Roblox can keep adding users for a long time
  • There are a ton of ways for the company to monetize the platform which are at very early stages
  • Management has been at the helm for a long time and they appear to be doing a great job with execution and have a clear vision for where they are going.

Downside

  • The growth rate is definitely slowing
  • Bookings per daily user is flat at best
  • Developers need to be paid to generate content and so gross margins will never be at the level of a true SaaS company
  • Roblox still isn’t a mainstream name–they may flounder as they are trying to “cross the chasm.”
  • Much bigger names like Facebook are making huge investments to create their own “Metaverse”.

My Conclusion
I think the long potential runway are wide range of monetization avenues makes this a compelling investment. I’m taking a starting position.

References:
https://www.fool.com/earnings/call-transcripts/2021/11/10/ro…

https://d18rn0p25nwr6d.cloudfront.net/CIK-0001315098/ad69fbb…

https://d18rn0p25nwr6d.cloudfront.net/CIK-0001315098/13772a2…

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OOOO…this is one I like. I have had a position for about 6 months, shortly after their IPO I think.

I agree with most of what you wrote. A few subjective points I have here are…

  • Metaverse: I was so confused that FB changing their name seemed to make this idea real. Roblox has been heading this way for a LOONG time. They have been hosting exclusively online concerts for years. The names of the performers are getting more mainstream. FB hasn’t done anything in the metaverse other than buy Occulus and then go back on their promises. To me, this is the company leading the way by focusing on the users and not by buying up tech.

  • Who is Roblox?: One of my very first steps was to ask all the parents around me if they had heard of it. I was testing how many kids were actually engaged. Wow, every one of them had a story and most of them are doing Robux (game credits) for xmas or birthday gifts. The kids seem to be burning through these things. To me it is a very mainstream name to all parents and their kids. It may not be mainstream to Wallstreet, but their customers seem to be everywhere.

  • Who is Roblox pt2?: From the earnings slides I noticed that the age range is starting to skew older. They are making inroads into the 20 somethings so the audience is expanding. This is a good sign because one of the risks was that their audience age was seen as so narrow. Another expansion in age is that parents are playing games WITH their kids. The complaint I hear often is how good the kids are and how dad got so confused and lost. :wink:

  • Is growth slowing?: Looking at the slides it seems that this quarters growth was still above pre-covid levels. The could be slowing, but my first impression is they are returning to the mean, and that growth is pretty decent. They are actually growing, despite any pull-forward effect lockdown created. With a narrow band of audience, this a great thing to me because it’s not like there were that many tweens created in the quarter.

  • Who pays the developers?: This is part of business model I like. The developers get paid based on how much money the users spend. So, Roblox is not paying people out of their own coffers. The players buy a currency called Robux so that they can customize their avatars, or get more weapons or stuff in the game. This is what pays the developers and Roblox takes a cut of all those transactions.
    Roblox makes money through the sales of its in-game currency Robux, advertising deals, licensing agreements, and royalties. The firm operates under a freemium model. While games are free to play, users will have to pay to unlock more advanced features and customizations.

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Thank you for the input. I thought about buying right after the IPO too, just to have a small position to talk about with my son, but…

One of my very first steps was to ask all the parents around me if they had heard of it. I was testing how many kids were actually engaged.

This was one of my hesitations in my first review. I have a 12 year old son who loves games (duh) and while he tried Roblox, he just isn’t into it and neither are his friends. I was misled by my small sample size. In the past few months, I’ve been hearing about Roblox from other people, including some 20-somethings who work for my company.

The developers get paid based on how much money the users spend. So, Roblox is not paying people out of their own coffers.

Functionally it is fair to think of it that way–developers only make money if the game makes money. Accounting-wise, developers get paid by Roblox. Of the ~$2 billion annual revenue this year, $500 million is going to developers. So, the balance sheet gross margin will likely never be the 80-90% of a true SaaS company.

That isn’t going to stop me from buying, but for the board members who are laser focused on a certain type of business, I believe it is an important note.

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