If you don’t have kids, there’s a good chance you’ve never heard of Roblox, a free online gaming platform best known for its Lego-like graphics. But if you’re an investor, you’re probably paying attention now.
Roblox Corporation, founded in 2004, went public on March 10, listing shares on the New York Stock Exchange at an opening price of $64.50, translating to a valuation of $42 billion. That represented a more than tenfold increase in the company’s worth since a funding round in February 2020 and catapulted it ahead of some of the industry’s biggest names, like Electronic Arts Inc., known for sports titles like FIFA, and Take-Two Interactive, which controls Grand Theft Auto.
Not bad for a company with no history of blockbuster titles whose biggest market segment is preteens. The rich valuation reflected both Roblox’s business model, which focuses as much on entertainment as it does on creating an immersive social experience, and the market for online gaming. In a nutshell, the industry is scorching hot, with the COVID-19 pandemic accelerating growth just as it has fueled the digital transformation of the global economy.
“Video gaming has a lot of strong tailwinds,” says Jimmy Stone, a finance expert in the Toptal network since 2018 and managing partner at financial consulting firm Alderbrook Companies LLC. “Not a lot of industries that large are growing that quickly and it checks a lot of the investment theme boxes from the pandemic.”
The expansion of mobile connectivity and proliferation of free-to-play games have been driving the growth of the industry for more than a decade, making it bigger than movies and music combined, according to Stone. With schools and offices shuttered last year to limit the spread of the virus, spending on games globally, including mobile and consoles, shot up about 20% compared to 2019, according to games market data company Newzoo, putting it on pace to reach $218 billion by 2023.
Investors have taken notice. One popular market proxy, the VanEck Vectors Video Gaming and eSports ETF, returned about 95% in the year ended Feb. 28. That compares with a gain over the same time period of about 57% for the tech-heavy Nasdaq 100, which reflects a broader cross section of companies that benefited from the pandemic’s dislocations.
Roblox’s public debut also anointed it a COVID-19 market winner, a category dominated by tech companies like Zoom Video Communications Inc. that saw usage surge and stock prices soar when employees around the world were sent home to work remotely amid mass lockdowns. The company directly listed its stock on the NYSE instead of raising more capital with an initial public offering, an increasingly popular strategy with tech firms that can cut fees and limit profits for investment banks.
Users, Revenue Surging
Daily active users on Roblox’s platform rose 85% to 32.6 million in 2020, compared to the year prior. Revenue, which is driven by small purchases known as microtransactions that players make during games, surged 82% to $924 million. The company is forecasting continued revenue growth in 2021, albeit at a slightly lower pace of about 60% year-over-year.
Its net loss also surged over the same period as it tried to keep up with the growth, reaching $253 million, though that did little to scare investors.
“It’s not just a video game company and it’s not a studio; it’s a platform,” says Zachary Elfman, a former analyst at a global hedge fund and Toptal finance expert since 2017. “They’re very well positioned for growth going forward.”
Gaming has always been about fresh titles and the latest graphics, but the industry today is as much focused on the social aspect of its products. People don’t just play games together online. In a survey conducted last year, the polling and research company Nielsen found that roughly one in four US residents were using video games to stay in touch with family and friends, a phenomenon made possible in part by the proliferation and popularity of multiplayer games, like Minecraft and Overwatch.
Nielsen also found in its survey that even though people were more sedentary last year they were spending even more time on mobile games, which saw usage grow faster than on consoles like Sony’s PlayStation and Microsoft’s Xbox, as well as personal computers. That can be seen as another plus for a device-agnostic company like Roblox that has stayed out of the hardware business and derives more than half its revenue from microtransactions made through its mobile game version.
Behold the Metaverse
From its founding, Roblox has envisioned an immersive social community for its players it calls the metaverse, like the one depicted in the 2018 movie “Ready Player One.” Just like in the film, Roblox users exist as avatars on the platform and can traverse the millions of gaming experiences available using the same identity. Or they can partake in virtual gatherings, like in November, when rapper Lil Nas X was transformed into Roblox graphics on the platform where he performed a concert, an event that attracted more than 33 million views.
The platform has also always made it easy for people to develop their own games, offering a series of simple steps in addition to more sophisticated development, which is one of the reasons more than half of Roblox’s users are under the age of 13. It’s also why there are literally millions of games on the platform. Roblox made it fun for kids to make them.
That’s also a competitive advantage, since the company doesn’t have to invest in developing new titles; users on the platform do it for them, says Elfman.
To close the loop on the self-contained platform, the company uses its own currency called Robux, which must be purchased to make microtransactions, which are often made in-game for things like avatar enhancements. The company similarly allows developers to keep the majority of Robux they generate, which can be converted to cash, creating an economy of tiny capitalists. More than a thousand developers earned more than $10,000 in Robux last year for their work, the company said in a filing before the stock listing.
One of the biggest challenges Roblox faces going forward is that in order to keep evolving it must monetize more of its economy, incentivizing even more successful game developers in its metaverse as it competes with companies like Unity Technologies that also offer end-to-end software development for game makers. Another is its popularity with children, which means it must be particularly zealous in ensuring its site is a safe space.
In the meantime, there’s still plenty of growth to be had. Two years ago Roblox formed a strategic partnership with Tencent, the China-based company that is the largest video game publisher in the world, giving the San Mateo, California-based company access to one of the world’s largest online gaming markets. A Chinese government agency issued a publishing license to the joint venture in December, allowing it to begin operating a local version of Roblox.
Brian Nichol, a London-based finance expert who joined Toptal last year, credits the company’s management, led by Co-founder and Chief Executive Officer David Baszucki, for building the company around a futuristic vision and letting the world catch up.
“He fully appreciates how to build your competitive moat,” says Nichol. “He gets it. It’s a social play.”