Video game developer Roblox (RBLX) has sold off hard since it announced its August metrics highlighted a few glitches at investor day. The downward moves come in the midst of general market heavy selling in the face of higher interest rates and raging inflation. August average bookings per daily active user (ABPDAU) fell 14-16% y/y and slightly from July to $3.89-3.96. The dip m/m was expected as the gaming companies most popular demographic (ages 9-12) is back at school, however y/y is higher than expected. Does this selling provide opportunity?
The bigger surprise has been to see bookings growth continue to decelerate. There are many questions here, is this a losing popularity event, is this due to less flexible spending available or just a temporary lull given the high levels during the pandemic?
The online virtual world-building game, popular mainly amongst kids and teens, faced selling pressure over the past quarter after daily active users (DAUs) growth slowed in August, the figure grew just 5-7% yr/yr, a meaningful slowdown from +8-10% growth in July. This trend is also present on a quarterly basis, with Q2 bookings dropping 4% yr/yr to $639.9 mln, a slight deterioration from a 3% dip yr/yr in Q1.
Thats the negatives but let’s look at some positives. DAUs continue to climb, jumping 24% yr/yr to 59.9 mln in August. With bookings growth waning while DAUs maintain a healthy expansion it explains the ABPDAU downward trend for much of the year. The metric has now seen at least a 20% tumble y/y in February, April, May, and July.
The company has pivoted toward operating as more than just a video game company through its brand partnerships, such as “Vans World” which gives users virtual skateboarding experiences as well as expansive music offerings that span launch parties and listening parties where artists do virtual meet-and-greets with fans and “Gucci Garden” for fashion fans. These offerings differentiate RBLX from other video games and are proving to keep users engaged.
What the company made clear at Investor Day is brands will be a significant component of RBLX’s business over the next 3-5 years. RBLX does not break out its advertising revenue in it’s report but it is a a key piece of bookings revenue.
When users buy in-game currency (Robux), with RBLX earnings showing around half as profit, they use it to purchase customization features like clothes and accessories. Here is Roblox in the Metaverse, the creators are being paid for designing these items. RBLX does, and can also strike licensing deals with brands, such as Gucci, so that users can purchase authentic-looking shirts, shoes, etc., for their in-game avatars.
What stands out is this advertising is in 3D and yes very meta verse friendly, take the NERF and Monopoly branding. This makes it a unique differentiator from ad-based social media platforms like Snap (SNAP) and Meta Platforms (META), which is ironic given META’s branding, and name change from Facebook we thought. This takes it away somewhat from that social media softness risk in advertising spending.
RBLX’s long-term vision is to replicate the real world through its brand partnerships instead of the vulnerability in the non-fungible token (NFT) marketplace. Which let’s be honest has fallen way off the grid. Game stock is engaging in that space so perhaps there is a tie up there in the future given GME’s heavy presence in collectables, with Roblox popular there.
What we would like to see is expanding RBLX’s popularity to an older demographic of 17-24-year-olds. Currently, RBLX is seeing this age range grow at a 41% rate y/y in August. At just over 13 mln DAUs, this groupis RBLX’s second largest, and for management to achieve its 1 billion DAU goal, having this group of users overtake its largest 9-12 cohort is vital. That would also add to the longevity of these users involvement.
Looking long term gaming trends remain higher than before the pandemic, the question is how many players will be retained in the new world? In the short term, bookings growth may continue to soften. We have seen reports from Take Two (TTWO) and Game publishing titan Activision Blizzard (ATVI), which have seen video game spending fall y/y every month this year. Keeping in pattern RBLX may continue facing short-term selling pressure, especially given its pricey valuation of ~9x forward sales. It is finding that happy place of between the rapid growth it saw during the pandemic as kids begin returning to more normal routines and school. RBLX is adjusting to the new hours engaged in the new normal world.
We also live in an era where the retail investor has been empowered, we all have heard about Robin Hood and self-directed traders at firms like E-Trade. Retail investors often purchase shares in cool or recognizable branding or companies, the so called MEME stocks. Roblox fits into that category.
Outside of the risk of buying in a stock market that has been pumped in recent years and particularly technology firms there is the end of stay-at-home risk. The risk in the stock is changing in the opening up environment and being classified in a category impacted by the back to school and work crowd. That is the major risk for the stock in current times, but it should be noted that the model is self-sustaining and is most likely to have a significant users input stay on. It comes down to managing expectations.
Roblox shares closed Monday September 19, 2022, at $37.10 ▼ 6.62 (▼15.19%) in the past week, essentially since investment day. The market at that close is $22.14 Billion. The stock has a 52 week High of $141.60 and 52weekk Low of $21.65.
According to the company’s S-1 filing on their direct listing, “We do not expect these activity levels to be sustained, and in future periods we expect growth rates for our revenue to decline, and we may not experience any growth in bookings or our user base during periods where we are comparing against COVID-19 impacted periods.”
Roblox was founded in 2004 by CEO David Baszucki and Erik Cassel founded Roblox with a “vision of connecting people through immersive 3D environments.” Roblox users create games and play games created by other users who become independent content creators. Roblox has exploded in popularity giving a sticky, loyal user base within a self-sufficient ecosystem.
Roblox has grown from user base of several hundred people and exploded into having tens of millions of games played by 32.6 million daily active users. With the COVID shutdown, and so many kids doing virtual schooling Roblox saw its daily users take off 85% over the past year, sales were up 82% along with them. Clearly there was a lot of extra time being spent on video games rather than schooling!
Even the organic immersion of Roblox games where new users and old ones stay and grow together. As more users join Roblox’s platform and potentially spend money on those games developers are incentivized to create more games. With that quality improves and the cycle becomes self-sustaining as long as content remains popular and evolving. There was a massive social element borne out by the pandemic. Even non gamers stay on to socialize. While adults have Facebook you could say, kids have Roblox for interacting with their friends in their virtual world.
From The TradersCommunity Research Desk