Roblox Stock Predictions

Roblox Corporation [NYSE: RBLX] is an online game platform and game creation system that brings players and developers together to imagine, create, and share experiences with each other in immersive, user-generated 3D worlds. It allows users to develop and play games created by other users.

All the online games on the platform are built by members of the Roblox community for members of the Roblox community using Roblox Studio, the platform’s proprietary game-development tool.

Furthermore, users can create their own avatars, with the option of customizing their avatars by purchasing Robux, the platform’s digital currency. Founded in 2004 by David Baszucki and Erik Cassel and released in 2006, the platform hosts user-created games of multiple genres coded in the programming language Lua.

The company went public in March 2021 via a direct listing on the New York Stock Exchange. The San Mateo, California-based company is ranked as one of the top online entertainment platforms for audiences under the age of 18 based on average monthly visits and time spent. However, Roblox is making a push to attract older audiences as well.

The Bull Case for Roblox

Roblox is a highly popular online gaming platform with more than 42 million active users. The free-to-play game and developer platform, especially popular with children (over 50% of its users are under age 13), allow players to create their own avatar and participate in different games, worlds and experiences.

The platform is free to join, but players have the option to enhance their experiences in these worlds through in-game purchases with a currency called Robux ($0.0035 = 1 Robux).  Robux, along with the subscription service called Roblox Premium, generates the bulk of the company’s revenues.

Roblox is keen on building a strong brand name for itself in the gaming world, just like YouTube has made its name for video content, Google [GOOG] and Facebook [FB] for social media, to quote a few relevant examples. 

Predominantly, Roblox, through Roblox Studio, provides free access to the tools and platforms that allow third-party developers to create experiences on the platform for players to enjoy and consume. The company believes that offering a better developer platform will draw more players towards it which, in turn, will lead to more revenue generation for Roblox.

Also, the company, unlike many of its competitors, has chosen to outsource the job of enhancing its platform to external developers and creators. This concept seems to be working well for Roblox, as the company has been doing well on important performance measurement metrics such as Daily Active Users (DAUs), Hours Engaged, and Average Booking per DAU.

Roblox averaged “31.1 million average DAUs across over 180 countries” during the first nine months of 2020, up from 17.1 million during the same portion of 2019. The hours engaged also increased with users on Roblox spending 22.2 billion hours in the first nine months of 2020, up 122% during the same portion of 2020.

The gaming company has outlined four strategic areas that it expects will accelerate its future growth.

China: A Growth Lever For Roblox

The US and Canadian markets hold a lot of potential for Roblox, as both these markets are still expanding. However, the gaming company sees more growth in the international market with the fledgling Chinese market expected to be its prime revenue generator for the future.

China has huge potential for growth and Roblox, keen on cashing in on this explosive growth, has entered into a joint venture with Chinese multinational technology conglomerate, Tencent.

Roblox “Owns” The Coveted U/18 Audience

Roblox, historically, has been popular with kids, and over 50% of its users are under age 13.

One of the company’s main growth strategies is to expand by attracting an older demographic.

The company is making good progress on this front by prudently employing all its free cash flow for enhancing developer capabilities such as better graphics.

Roblox In Acquisitive Mode

This is another area where Roblox is focusing heavily to offer players the most immersive experience possible on its platform. To achieve this objective, Roblox recently acquired two companies that can help it offer better experiences on the platform. It acquired Loom.ai to enable its users to create realistic 3D avatars.

Loom.ai brings real-time facial animation tech using deep learning neural networks, computer vision, and visual effects, allowing for creation of the metaverse, the universe of virtual worlds.  Similarly, the acquisition of Imbellus, which develops simulation-based tests that measure human thought processes, could help in making gameplay more immersive.

Apart from these two, the company is also actively pursuing other verticals capable of broadening its platform’s appeal. For example, it is expanding the hardware that Roblox can be played from such as Play Station and Nintendo Switch.

More importantly, it has been working hard on expanding the mobile phone functionality of its game, which makes a lot of sense given the fact it is one of its most penetrative markets.

Premium Services Drives Top Line Sales

The primary goal is to expand avenues for revenue for the company. Roblox is constantly increasing the different methods of payment that it is accepting.  

Also, it is focusing on other revenue streams such as e-commerce and brand advertising to enhance its top line sales.  The firm’s subscription service, called Roblox Premium, provides players with a monthly stipend of Robux at a discounted rate, thereby providing the company with a consistent source of economy inflows.

Moreover, any company with millions of online users would be keen to leverage this medium to create opportunity for additional revenue. Roblox is doing the same by hosting digital concerts, online educational classes, digital award ceremonies, e-commerce sales of merchandise, trade shows and digital parties, to name a few.

However, Roblox has been frank enough to admit that all these initiatives are in their early stages, and their impact and contribution to the company’s overall revenue will be accurately assessed only after some time. If the company turns out to be successful in integrating these initiatives into the Roblox metaverse, it would significantly increase the company’s overall value and appeal.

100% YoY Revenue Growth May Slow

The company had a stupendous 2020, thanks to a Covid-derived tailwind. As a result of global Covid-19 shelter-in-place policies, the company enjoyed year over year revenue growth in excess of 100% as its users spent more time online at home. However, growth rates in revenue for the company may decline with easing lockdowns and opening up of the economy.

The company had a phenomenal 2020/Q1’21 with positive operating cash flows and ever-expanding bookings. Roblox, no doubt, is expensive, but the company is keenly exploiting other revenue channels, and the early signs look promising.

The company’s management is executing their outlined core strategy well, and additional revenue streams outside gaming could really help the stock. All in all, Roblox is an interesting value proposition for long-term investors.

The Bear Case for Roblox

Roblox operates in a very competitive environment, as evidenced by Ubisoft Entertainment SA’s plans to place a greater emphasis on free-to-play games. In fact, the company’s operating model means it competes for users, developers and creators.

Roblox itself admitted that “we compete for users and their engagement hours with global technology leaders such as Amazon, Apple, Facebook, Google, Microsoft, and Tencent, global entertainment companies such as Comcast, Disney, and ViacomCBS, global gaming companies such as Activision Blizzard, Electronic Arts, Take-Two, Valve, Unity, and Zynga, online content platforms, including Netflix, Spotify, and YouTube, as well as social platforms such as Facebook, Instagram, Pinterest, and Snap.”

However, Roblox has a unique business model where it capitalizes on the creativity of others. This has helped the company to grow at a quick pace, and allows it to continue with its growth in future as well.

Also, 2020 was an extraordinary year for the company as the pandemic forced a lot of people to spend more time at home. It was reflected in its results, with the daily active user count growing by 85% from the end of 2019 to the end of 2020. 

The unicorn gaming company, however, warned that “in future periods” it anticipates “growth rates for our revenue to decline,” going on to add that it “may not experience any growth in bookings or our user base during periods” that are later compared to its COVID-boosted 2020 results. This should create volatility in the stock during the next few earnings reports as growth levels moderate and performance normalizes.

Also, despite strong growth lately, and a promising future ahead, Roblox appears to be pretty expensive.

Roblox’s stock price has already doubled from its reference price at IPO ($45), and the company’s recent 1Q 2021 financial performance has caused its price to surge over 30% in the last month. RBLX is primarily concentrated in a specific age demographic (50% players are below 13), and the company has yet to prove that it has been successful in luring older audience to its platform in a significant manner. 

In other risks, the National Music Publishers’ Association (NMPA) recently filed a $200 million copyright-infringement lawsuit against Roblox, alleging that the online gaming platform failed to pay royalty to artists whose content featured regularly within the Roblox game world.

The NMPA lawsuit highlights the question of what responsibilities the company has vis-a-vis users uploading copyrighted works. While $200 million is a big amount, it looks insignificant in comparison to Roblox’s over $50 billion market capitalization.

Also, the business does not depend on copyrighted works for a significant portion of sales. The company can also tap huge growth opportunities in media promotion, brand advertising, and e-commerce by tying up with artists and removing unlicensed copyrighted works from its platform.

To sum it up, the key risk for Roblox include intensifying competition and future growth in older users falling short of market expectations, in which case RBLX could potentially see a slower pace of growth for DAUs and Hours Engaged in the future. In other words, it remains to be seen if it can justify its current inflated valuations.

Roblox Stock Price Forecast

Analysts 12-month price forecasts for Roblox Corp range from a low of $80 to a high of 103.00.

On average, they anticipate Roblox’s stock price to reach $88.00 in the next year. This represents a possible upside of 5.61% from the stock’s current price.

Is Roblox Stock a Buy?

Roblox went public on March 10 this year, and its first earnings announcement as a public company went down well with investors. The video game platform made a successful debut as the pandemic led to shutting down of schools and suspension of outdoor sports.

In the first quarter, daily active users, or DAUs, jumped 79% year-over-year to 42.1 million.

The more the company can grow its average bookings per DAU, the better the company’s performance. Users spent 9.7 billion hours on the platform, up 98% year over year from March 2021. This engagement translated to $652.3 million in bookings, up 161% year over year.

On a quarterly basis, the average booking per daily active user was $15.48, up 46% year over year.

Roblox, unlike other gaming companies, does not make its own games. It operates a co-experience gaming platform where users can interact with each other, create games and, likewise, play games created by others. The Roblox library, as of today, contains over 50 million games. Roblox is especially popular with younger demographics; more than half of its user base is children around the age of 13.

The children-centric platform witnessed a huge surge in popularity during the pandemic as Covid severely curtailed outdoor entertainment options for children and adults alike.

It is, therefore, natural for the management as well as the investors to hope that most of the new players will continue to contribute to the growth of Roblox even after the pandemic subsides, and entertainment options for people expand.

Let’s find out then whether it is the right time to add Roblox to your portfolio.

Can The Company’s Dream Run Continue?

In all, as of the end of the first quarter, Roblox had 42.1 million daily active users (DAUs), a jump of 5 million from the end of Q4 2020.

With vaccine rollouts and falling coronavirus cases, state governments across the country have loosened business restrictions to a large extent. Roblox still gained 1.3 million new DAUs in the U.S. quarter over quarter, even as life limps back to normal. While it’s too early to come to a definite conclusion, there’s hope that Roblox will continue to perform well even as economies reopen.

Also, coming to demographics, over 50% of its users are under the age of 13. The company stands to benefit in two ways from it. First and foremost, children around the age of 13 may be able to contribute to the growth of Roblox throughout their childhood and beyond.

Additionally, the company has an opportunity to reach out to older generation by investing in making its platform more attractive for those who are older. It did a brilliant job of this in 2020, more than doubling its older base (players above 13) from 7.7 million at the start of the year to 17.7 million at year’s end.

How Roblox Generates Revenue

Roblox makes money through the sales of its in-game currency Robux. The firm operates under a freemium model.

While games are free to play, users will have to pay to unlock more advanced features, access restricted areas on the platform or buy special items to customize their avatars. The currency is available as a one-time purchase or via a monthly subscription called Roblox Premium. Roblox then shares a portion of that revenue with its developers (24.5% of all the revenue generated within their games).

In the first quarter, the average booking per daily active user rose 46% year over year to $15.48.  It’s good news for investors as it shows that Roblox, apart from adding millions of active new users, is also enticing players to spend more money on average.

The company also derives a portion of its revenue from advertising by tying up with different brands that, in turn, promote their products and services on its platform. The company also gets paid a licensing fee when partners like Toys’R’Us or Walmart sell Roblox-branded items.

Advertising and licensing fee contribute a small portion of the firm’s revenue, but, in the longer run, Roblux expects more revenue and higher profit margins from both, Robux transactions and advertising.

RBLX Financial Multiples Are Lofty

Roblox stock trading at a lofty forward price-to-sales ratio of 22.60 by no means is cheap. But the company has immense possibilities ahead. It’s growing its user base demographically and geographically, by trying to penetrate the older age groups.

The firm is also tapping other revenue streams such as advertising and overseas expansion. Its developer-payment program has also started to pay off by encouraging developers to build superior quality games. 

And RBLX’s two key operating metrics, DAUs (Daily Active Users) and Hours Engaged (the amount of time that users stay on the platform), continue to rise which, in turn, again attests to the stock’s attractiveness as a potential investment candidate.

A research report published by GameRefinery in April revealed Roblox was the most popular gaming app on iOS in the US, boasting a market share of around 5.5% in the first quarter of 2021.

All in all, RBLX boasts a number of exciting growth opportunities, but the company also has to deal with intensifying competition. Investors looking for a fast-growth stock with lots of potential should consider adding RBLX to their portfolio. F

uture growth expectations for RBLX are high, but investors need to be aware that there could be bumps ahead if the company fails to attract significant number of older users, and competitors manage to draw users away from the Roblox platform.

Roblox Investment Thesis Conclusion

Roblox has been flying high since its direct listing in March.  The company’s unique business model (it does not make its own games unlike other gaming companies), robust growth rate and expanding avenues of revenue, continue to impress investors and experts.

Roblox lets people create video games with a simple block-based system and, through this, Roblox is creating a metaverse, or a virtual society where users can play, socialize and work. 

The simplicity of its platform, which doesn’t require developers to possess intricate coding experience, makes it extremely popular among tweens. In fact, Roblox’s main user base is children around the age of 13, which is a good thing for the firm as they may be able to contribute to the growth of Roblox throughout their childhood and beyond.

Roblox, more or less, is a children-centric platform (the majority of its users, 54% to be exact, are all under the age of 15), and therein lies both risks and opportunities for the firm. Roblox has fast become highly popular with children, becoming an important part of younger children’s entertainment life.

While games are free to play overall, users can only access more advanced features and customizations with an in-game currency called Robux. This currency can be converted back to U.S. dollars at a set exchange rate.

It means that, in order to enhance their playing experience, children will coax their parents to purchase them some Robux. Thus, Robux is a direct revenue stream for both, the company and its game creators. However, since the firm’s main user base is children with no income of their own, Roblox is significantly dependent on the generosity of parents for its income, which could be dicey for the company. 

Also, in the best-case scenario for the company, children who do not play games on its platform, may be tempted to do so after seeing other children play. Under such circumstances, Roblox can see exponential growth in its DAU (daily active users). In the worst-case scenario, children who are hooked to the Roblox platform may grow out of it once they become older.

Despite Roblox’s immense effort to expand its reach to older users, its main users are still young children. It means the firm has to constantly keep on advertising to young children to maintain its number of users.

In short, being overwhelmingly dependent on tween users means the company can suffer tremendously if Roblox is not the “cool thing” anymore for children. Also, there’s the risk of its content creators graduating to more complex game engines like Unity, or simply quitting in case Roblox reduces Robux’s real-world value.

Roblox’s Growth Story So Far

In the first quarter of 2018, Roblox’s DAUs was 10.3 million. In the first quarter of 2021, that figure jumped to 42.1 million. Its total hours engaged rocketed from 2.1 billion to 9.7 billion, while its average bookings per DAU rose from $11.62 to $15.48.

The pandemic brought unprecedented windfall for the company as restrictions and lockdowns compelled children to stay at home. This significantly accelerated the company’s revenue. However, it is still to be seen if users spend a similar amount of time after the pandemic on the platform, which would mean the pandemic provided a permanent boost for the firm.

This scenario, however, looks doubtful as children will have less time for Roblox once schools fully re-open or more entertainment options arise as the economy opens. Investors, as such, may need to keep a close eye on metrics like engagement hours and DAU going forward.

Roblox believes it can net in more users by expanding geographically beyond its main markets, Canada and the US.  The most promising market, of course, is China, where it’s partnered with Tencent Holdings, the world’s largest video game publisher.

Also, metaverse (an online parallel universe where people can socialize, work, and play) holds tremendous growth potential for Roblox.  Users play games and socialize while content creation is left to developers. This unique model possesses enormous possibility for the company as it can help it expand its advertising revenue by allowing the firm to partner with different brands. Roblox can also hold virtual concerts on its platforms, which can be attended by millions of users. The firm can also benefit from launching new features, which can help it boost its appeal with older gamers and developers.

Conclusion

Roblox has immense possibilities, though there is certain amount of risks present as well.  It is a children-focused platform and a metaverse platform, which presents both a risk and reward scenario. The children-centric platform carries certain risks, but being a metaverse platform also provides tremendous reward opportunities.

Roblox also has a fairly healthy balance sheet (1.6 billion dollars in cash with about 2.8 billion dollars in total assets), and is growing rapidly, which makes it a promising investment target. However, it’s too early to tell if it can sustain its pandemic-induced growth, or reign in its high-operating expenses. 

More importantly, the stock looks overvalued, which means that the company has to grow much faster than what the market expects. All in all, investors are advised to be cautiously optimistic on Roblox.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.