eResearch| If you don’t know what Roblox is, find a tween or teenager to explain.
At its core, Roblox is an online platform or toolbox for making games across several genres (e.g., shooting, role-playing games, or strategy games).
It is free-to-play but, with millions of users, generated $590 million in revenue for the first three quarters of 2020, including $242.2 million in the third quarter.
Roblox filed a second amendment to its S-1 Prospectus in preparation for a listing on the New York Stock Exchange (“NYSE”) in February of 2021 under the ticker “RBLX”. However, recent scrutiny from the SEC may delay listing.
Originally planning for an initial public offering (“IPO”) in November 2020, the first delay came from a strategic choice to proceed through a direct listing rather than the traditional IPO.
A direct listing is a less common mechanism for a company to list its shares publicly and is considered less costly but riskier for current investors. Roblox’s choice to pursue this strategy follows recent NYSE rule changes that now allow a direct listing to raise new capital at the same time as the listing.
The most recent delay stems from revenue recognition practices from the sale of their internal digital currency Robux. Robux sales are recorded as “bookings” and captured as deferred revenue on the balance sheet, accruing over the average lifespan of the user. Deferred revenue ($1.3 billion) accounts for 90.1% of total liabilities as of September 30, 2020.
What is Roblox?
The success of Roblox builds – block by block – on Minecraft, which was purchased by Microsoft for $2.5 billion in 2014. The popularity of Minecraft has arguably created the demand for more sandbox‑style games.
But Roblox sees itself as more than a sandbox game. Founded in 2004, Roblox considers the game a “human co-experience platform”, where developers and creators make new games and digital environments for sale and sharing. Roblox exists across all gaming platforms, from phone to desktop.
Roblox follows the “freemium” model as it is free to download and generates a majority of revenue from sales of a digital currency Robux. Robux can be used in-game to purchase experiences and enhancements on the platform, which can draw huge audiences – like the 33 million users who recently attended a virtual Lil Nas X concert.
FIGURE 1: Lil Nas X Roblox Concert Image
The newest funding round investor included Warner’s Music Group, prompting speculation that more digital concert experiences are on the horizon for Roblox.
A subscription offering, Roblox premium, and international expansion are currently underway.
Financials
Roblox raised two rounds of funding in the last year. In February 2020, it closed a $150 million round with support from Andreessen Horowitz, followed by a $520 million investment in January 2021 led by Altimeter Capital and Dragoneer Investment Group.
Priced at $45 per share, the latest funding round increased the implied valuation of Roblox from $3.4 billion in 2020 to a reported $29.5 billion.
Explosive growth is driving the current valuation. Daily active users (“DAUs”) have increased significantly over the past two years to 31.1 million, with 47% growth from 2018 to 2019 and 81% growth in the first nine months of 2020.
In the first three quarters of 2020, DAUs spent 2.6 hours each day, amounting to 22.2 billion hours in the first nine months of 2020. That is 32,000 lifetimes just this year! It is also more than twice as much time as users (4-15 years old) spend on YouTube (1.4 hours) or TikTok (1.3 hours).
With 67% of Roblox’s DAU under 16, some of the growth enjoyed by Roblox is related to the ongoing pandemic and resulting stay-at-home guidance from public health officials and in-person school closures.
FIGURE 2: User Demographics
Video Game Market
According to IBIS World, the expected US Video Game market is set to reach $65.5 billion in 2021 and follows an impressive annualized growth rate of 8.7% over the past five years.
As Roblox just focuses on its development platform, it is a pure-play in the video game space, unlike other developers and publishers such as Zynga (NASDAQ: ZNGA), Activision Blizzard (NASDAQ: ATVI), Microsoft (NASDAQ: MSFT), and Electronic Arts (NASDAQ: EA) that own multiple titles.
Notes: All numbers in USD unless otherwise stated. The author of this report, and employees, consultants, and family of eResearch may own stock positions in companies mentioned in this article.
