Date: 11/27/2020
Author: Mr. X
Last week, we spoke about the Console Wars that will determine the future of the thriving gaming market. Microsoft’s XBox and Sony’s PlayStation will seek control over different gaming franchises and fight to protect their brand. Nothing here is new – it’s just the next front in a battle that’s raged for over a decade.
However, what if you had a platform where players themselves were the game developers? What if it had an economy all its own, thus incentivizing players to spend ever greater amounts of time and energy? What if this platform even had its own kind of currency, a sort of halfway cryptocurrency that can already be used to purchase things people value? Best of all, what if this company is already generating positive cash flow?
That company exists and is about to go public. That company is Roblox. And if you have children between the ages of 8 and 12, they probably know more about it than you. (Trust me – ask them and prepare yourself for a monologue at least an hour long.) Most of the company’s users are under the game of 13.
Roblox recently filed for an IPO that will hopefully take place before the end of the year. The ticker will be RBLX. The “game” is free-to-play. It’s not really a singular game at all. It is best described as a platform that allows users to create their own games. It features a kind of currency called “Robux” which allows in-game purchases or new experiences.
There is also a subscription model, Roblox Premium, which provides the company a steady revenue stream. Roblox Premium provides a discount for in-game purchases, which can include changes to a character’s avatar or desirable items.
What makes Roblox distinct is that it is considered child-friendly and “safe,” despite some recent scandals about vulgar or pornographic material found on the platform. However, journalists’ fixation on these unfortunate events actually serve to highlight the overall safety of the platform. They were the exceptions that prove the rule.
Roblox has an interest in making sure as many young players have access to as many minigames and realms as possible. We can expect the company to live up to this responsibility out of sheer self-interest.
While pre-teens might preach passionately about the importance of “Robux,” investors are more likely to be interested in the company’s year-to-year revenue growth in the real world. In 2018, total revenue was $312.8 million. In 2019, it was $488.2 million. Revenue is growing at an even more rapid clip this year.
The company’s fiscal statements may even be more impressive than they initially appear. When Roblox collects money from sales of “Robux,” it is considered deferred revenue. Thus, though Roblox posted a net loss of over $200 million over the first nine months of 2020, the company is actually in a far better financial position.
In other words, when users buy “Robux,” which can only be spent on features on the platform, the company can’t count this as revenue until users spend it. The cash-flow is front-loaded; the reports are back-loaded.
Not surprisingly, the company’s number of daily active users (DAU’s) has also increased dramatically during the COVID-19 pandemic. This is one reason investors might want to be cautious – engagement tends to fall when lockdown orders are lifted and schools are fully reopened.
However, with COVID-19 spreading in the United States more rapidly than ever, and with an expected spike in new cases following the Thanksgiving holiday, we will probably see an even greater increase in engagement in the short-term.
Another trend is even more important. While Roblox is clearly a game for kids, it has an increasing number of teenagers and young adults using the platform. These consumers are also those who will create and promote more complicated and engrossing online experiences.
If current trends continue, these older users with independent disposable income will gradually take the place of younger players. If the platform can keep its core audience but shed its “just for kids” reputation, it will also become the home for an entire new generation of content creators, developers, and artists. This will be a challenge, but the opportunity is almost beyond calculation.
NASDAQ argued recently that Roblox could become the “YouTube of Gaming.” This may understate the case. Roblox could be bigger. YouTube originally was just a platform. It allowed new artists and online personalities to develop free of corporate control or top-down programming. It was perhaps inevitable that the quest for monetization required more content management and central command. However, much of the creativity, originality, and charm of the platform’s early days have been lost. YouTube is rarely where you find original content today. Instead, it’s where you watch clips from last night’s late-night comedy shows.
Roblox has already solved the monetization problem in many ways with its in-house currency system. To some extent, it has done what Facebook tried and failed to do with Libra. Now, it just needs to attract a more profitable market, maintain existing user engagement, and protect younger users from inappropriate content.
There will still be dangers, especially if parents, watchdogs, or legislators demand the company more aggressively monitor what is or is not allowed on the site. For now though, Roblox is counting on users’ own dedication, innovation, and intelligence. People want control over their own content and a way to develop new revenue streams. Roblox can provide it.
This is an exciting opportunity for both developers and investors. When RBLX goes live, this stock will be one to watch.
