The case for Roblox – A trillion dollar company

Recently, Roblox ($RBLX) has been making the news cycles with an outstanding earnings report. This company was started in 2004 but only really caught my interest 3 or 4 years back when I started hearing about young children spending thousands of dollars on the platform. Is that surprising to you? It certainly was for me. A simple Google search will yield thousands of results that make you wonder how children with zero earning power are getting their hands on this type of money.

More importantly, parental concerns about fiscal responsibility aside, it signals that this company is really onto something. Enough to entice tremendous populations of children aged 9~12 to rack up incredible bills in a short span. However, money is not the end all be all, plenty of games have failed to convert short-term gains into long-standing, enduring success. Let’s explore why I believe Roblox is on a different trajectory.

The gravity of irrelevance

Think back to a time you or someone you know spent a lot of money on an internet game. Whether it be Runescape, Maplestory, World of Warcraft, League of Legends, Minecraft, PUBG, Puzzle and Dragons, Clash of Clans, Pokemon Go, Fortnite, the list goes on. For most of these games, they’ve had outstanding success, and have made tremendous profits off a portion of their player base, which largely subsidizes the playing costs for low or non-paying players in exchange for a marked advantage in their gameplay or cosmetics.

However, much like professional sports, even the very best struggle to maintain their performance and run for very long, save for outliers like Tom Brady and Faker who have had extraordinary careers well beyond the mean. Games like Maplestory and Puzzle and Dragons have turned their parent companies into significant, dominant players in the space, but attempts to replicate these successes often fall flat. Even the most widely-subscribed free-to-play games fail to convert said success into true long-term staying power.

How is Roblox different? Simple, Roblox is not a game. So what is Roblox exactly and how is it going to overcome this age-old gravity of irrelevance? Let’s take a look at the numbers.

What exactly is Roblox?

“Roblox” is a platform that consists of 3 main offerings:

• Roblox Studio – The tool used to created experiences inside Roblox

• Roblox Client – Where experiences take place whether inside of a phone, tablet, or game console

• Roblox Cloud – Open Cloud for developers to store resources and assets and make their experiences available to all platforms

For the purposes of this post, we’ll mainly be focusing on the Roblox ecosystem, which includes all 3 but mainly address the visible aspects regarding player/partner experiences on Roblox Client and not so much the developer experience for Roblox Studio and Roblox Cloud.

Think of Roblox as an ecosystem where people can go to meet, play, earn, learn, and more. It’s a constant evolution where its participants can choose to expand on it as experiences are driven by the community. Individual creators create games and hook into this ecosystem with over a billion existing users. Experiences range from world-exploring, building, learning, taking care of pets, and having the ability to evolve and change along with the world and lifestyles we experience.

To date, there are 10.5 million developers on the Roblox platform who create new and exciting experiences in addition to the 27 million existing experiences, gaining instant access to 47.3 million daily active users.

Roblox provides the tooling and access to a massive economy that most game developers can only dream of. In exchange, it pays out 22% to developers that build on its platform, keeping a whopping 78% to grow the business. Nevertheless, developers are happy to continue with this arrangement, to the benefit of all parties involved.

What is it, really?

Now that we have a high-level overview of Roblox’s offerings and the scale at which it operates, let’s explore more about what Roblox really is and why it warrants a much larger market cap ($65B market cap at the time of writing).

We’ve previously looked at the staying power for very successful games, but given that Roblox is not a game and more a platform on which millions of games and experiences are developed upon, what are more appropriate comparables? Enter content ecosystems.

Youtube, Twitch, Spotify, App Store, Google Play Store. These are platforms that enable users to produce content and gain access to a vast number of viewers/users/customers. In return, the platform takes a significant chunk of the content creator’s revenues on the platform with the implied promise that the platform will grow larger and in turn, provide even more revenue for creators.

Once these platforms gain momentum and dominance, they have a significant flywheel effect that generates massive growth and becomes impossibly difficult for new entrants to compete and displace. By choosing to develop on Roblox, you gain unparalleled access to market opportunities that you otherwise would not have access to, no different than publishing apps on the App Store or videos on Youtube. Likewise, as more and more creators choose to build on Roblox, its value proposition and staying power increase, creating more incentive to build on it.

All of the above platforms are experiencing 20~30% year-over-year growth, with App Store showing revenues of $72.3B in 2020, of which gaming makes up 65.8%, while Google Play Store made $38.6B, Youtube made $22B and Spotify made $8.98B.

Roblox growth and numbers

There’s no doubt that COVID has been a major tailwind for the gaming sector, with Roblox being a significant beneficiary of that boon. That said, despite the reopening of many cities around the world, Roblox has not seen much of a drop in their player numbers despite what many expected, and is continuing to sustain the massive growth it’s shown in the past few years.

Roblox has shown 50~80% growth in each of the past 3 years and projects well over 100% growth this year vs 2020. Roblox continues to progress its Developer Platform Roadmap with significant features such as automatic translations and Talent Hub. With a very active developer community responding and giving feedback to each of these changes, I have no doubt these features will boost playership many-fold globally and create more career opportunities within the Roblox ecosystem, creating additional flywheels for success.

Average booking (spend) per user is a strong $13.49, with 47.3M daily active users, up 31% from Q3 2020. Users spent 11.2B hours engaged on the Roblox platform, up 28% from Q3 2020.

Partnerships

With such an immersive and boundless universe, many of the top brands are seeking out opportunities to build on Roblox to further engage with and connect with its young and budding user base. With endless possibilities to create events and displays not possible through COVID lockdowns, and even beyond the realm of possibility in the real world, Roblox is becoming the key to developing a loyal fanbase and gaining brand recognition for brands that would otherwise struggle to reach this demographic.

Progress happens gradually, then suddenly. After 16 years, it’s no longer a possibility for all sorts of partnerships to happen on Roblox, it’s a necessity. Brands and companies not getting a piece of the metaverse pie will soon find themselves left behind.

Progress happens gradually, then suddenly

To date, merchandise has been sold on Roblox, with a digital version of the Gucci Dionysus bag being purchased for $4,115, fetching a premium over the price of the physical bag by > 30%. There have been concerts and parties with Lil Nas X and Zara Larsson thanks to a deal with Sony Music. Twenty One Pilots has also hosted an exclusive concert within the virtual world.

At the time of writing, Ralph Lauren has just announced its own experience on Roblox, “Ralph Lauren: The Winter Escape”, an exclusive collection featured within an immersive winter sports world with exclusive digital merchandise available for purchase. Users can ice skate with friends, customize their own hot chocolate, and decorate the Holiday Tree.

As more brands, artists, and offerings make their way into the massively expansive and unrivaled universe within Roblox, it will be a major miss for others not taking part. I fully expect the partnerships and rich experiences in this space to rapidly expand and displace investments and offerings from their real-world equivalents.

Brands and artists that have taken part in expanding the Roblox universe so far have included: Lil Nas X, Zara Larsson, Twenty One Pilots, KSI, Poppy, Hyundai: Hyundai Mobility Adventure, Vans: Vans World skatepark, Gucci: Gucci Garden, Nike: Nikeland, and now Ralph Lauren: The Winter Escape.

Growing challenges

User interface polish

Subjectively speaking, the UI is very unpolished and leaves quite a bit to be desired. Upon speaking with older gamers, it’s clear Roblox is a far cry from the AAA titles most older audiences are accustomed to playing. However, it’s this intentional and *deliberate* lack of polish and “blocky” aesthetic that has huge acclaim with its younger audience. More importantly, Roblox has managed its success *in spite of* these areas and it’s further proof of its market fit.

As Roblox continues to expand to older and more mature audiences, I fully expect the company to continue to make inroads here, as they are already making significant progress in this area.

Downtime

Towards the end of October, Roblox experienced a lengthy 70 hours of downtime, that’s a significant outage for any internet service at this scale. Management has addressed this in its Q3 Shareholder letter and Investor Day, along with updates on Twitter and the company blog. Additionally, using historical data, they’ve come up with and communicated an estimate for the lost bookings of about ~$31M, and have proactively compensated developers for their cut of this lost revenue, $6.8M.

As of now there is no reason to expect similar outages to show up in the future and this seems to be a one-off situation, but only time will tell.

Education

Bit of a misnomer here as this is more of a massive opportunity that Roblox is well-equipped for, but it will be a challenge nonetheless. Roblox is a platform that is capable of offering unparalleled learning experiences to facilitate and improve our dated learning paradigms like never before. Roblox has already clearly stated they are making inroads here and with China’s recent tightening of gameplay restrictions in hopes to bolster a more productive and entrepreneurial youth, this will be a key differentiator to see how much market share Roblox can capture in China’s massive population.

How this is ultimately executed and marketed will no doubt be key in how successful Roblox is in this regard, but the opportunities are endless and the TAM (total addressable market) for global education is massive.

Personal position and outlook

Needless to say, I see Roblox as an underappreciated opportunity despite its current valuation of ~$70B. Roblox has the potential to be a $1T company and be a leader in the metaverse so long as it is able to continue to execute and create shared wins for those in its creator economy, its partnerships, and users. This is a company I will continue to look to accumulate a larger position in so long as management continues to deliver and the chart attests to its strength.

Not mentioned in this post (due to length) were some of the strategic acquisitions Roblox made recently [4]Guilded, Sway, Bash Video, etc, which send a very clear and holistic signal of where the roadmap is headed and how Roblox is going further to produce an even richer and fuller immersive experience in the metaverse.

In the spirit of full disclosure, I hold positions in Roblox ($RBLX) worth 8 figures at the green circles indicated in the chart and will progressively increase my stake and take profit as I see fit. That said, I am not a financial advisor, any statements and opinions expressed in this post or on this site are not to be taken as investment advice but merely the sharing of my own personal journey. As always, see the disclaimer before taking any action.

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