We believe there will be a transition to the “Metaverse” in gaming and other segments of online activity, and that the platform built by Roblox ($RBLX) is well positioned to benefit from this transition. Roblox has a strong moat due to their massive ecosystem of users and developers - 46.6 million daily active users and over 7 million developers - which we believe makes it almost impossible for competitors to replicate long term. We believe this will justify a market capitalization in the hundreds of billions long term if management can continue to attract developers and content creators to build a self-fulfilling viral loop, as shown below:
Company Overview
Roblox is an online platform for games and social experiences and game/experience creation system developed by Roblox Corporation. Roblox allows anyone to create their own virtual games and experiences using its proprietary engine, Roblox Studio, which can then be played by other users. These are coded under an object-oriented programming system that essentially enables developers to manipulate the environment of the game or experience. Users are also able to create purchasable content, known as “game passes,” as well as microtransactions that can be purchased more than once, known as “developer products.” The revenue generated is split between the developer and Roblox Corporation, with 70% going to Roblox Corp and 30% going to the developer. The majority of these games and experiences are produced by minors and a total of 20 million are produced per year through Roblox Studio.
The Roblox direct listing took place on March 10th, 2021 at a share price of $64.50, a $35.5B market cap. On its first day of trading, RBLX shot up 54.4% and closed at $69.50. Despite the high valuation, we established an initial stock-only position in the fund at an average price of $65.11 on it’s direct listing, and have added some long term call options since then.
User Growth & Demographic Expansion
As of July 2021, Roblox has over 46.6 million daily active users (DAUs) worldwide, up 28% from last July and up sequentially from 43.3 million users in June 2021. What is most interesting about this growth is the expansion of Roblox’s user demographic. For most of Roblox’s existence, their main demographic was users in the United States and Canada, under the age of 13. However in the past year, Roblox saw 42% growth in DAUs outside of US/CA and 46% growth in DAUs over the age of 13. Not only that, but Roblox saw an increase in Hours Engaged of 29% compared to last year for DAUs over the age of 13, meaning the older audience is not only growing but also remaining active on the game. This shows that Roblox is capable of adapting their game in order to reach a wider range of users and future user growth should remain strong.
“Developer Ecosystem” Moat
As stated previously, Roblox has an ecosystem of developers that creates games and experiences for other users to play. These developers are essentially the backbone of Roblox’s ecosystem as they are the main driver of content. Roblox has over 7M active developers worldwide and Roblox Corp projects to pay out upwards of $500M to their developers throughout 2021. Good Soil believes that Roblox Corp has built a platform described comprehensively in this blog post as a ‘company town’ ecosystem. It is a near impossible task for any competitors to actually build something of similar growing size and success
This dynamic is extremely advantageous financially due to the fact that Roblox Corp themselves do not have to spend upfront capital in order to continuously update the game with fresh content. They simply provide the platform for their users to create whatever they would like and users are financially rewarded based on the success of the content they create - meaning Roblox Corp is only paying for the content that actually provides benefit to the game. This also helps expand the creative direction of Roblox because anything that users want to play or do within the game, they have the freedom to build on their own. This parallels to our previous point of Roblox’s strong demographic expansion: as a wider range of user demographics make their way onto the game, they will create content tailored for their audience, furthering the “self-fulfilling viral loop.”
The Gaming Industry & Metaverse
In 2020 the video game industry was estimated to be worth $160 billion and is projected to grow to $300 billion by 2025. Social games such as Minecraft, Fortnite, etc. have seen enormous growth as games evolve into their own “metaverse” - becoming a place for gamers to not only play games but also hang out with friends and build whatever their imagination allows. This enables an enormous opportunity for expansion, especially if Roblox Corp adopts augmented or virtual reality. We think this is in the cards as the next step as Roblox Corp continues to adapt their platform for a wider audience.
On top of the company’s core gaming platform, they are also becoming a destination for unique event-based gatherings such as online concerts. For example, a concert by Lil Nas X exclusively on Roblox was attended 33 million times. This new use case serves both as a means for onboarding new users to the core gaming service, as well as an entirely new segment which provides growth opportunities beyond gaming.
Key Metrics Worth Noting
The latest available data comes from Roblox’s Q2 2021 earnings report, which indicated continued improvement in the company’s key metrics. Many critics of Roblox’s growth have pointed out that this was accelerated by the impact of COVID shut-downs, and that growth experienced in 2020 may have been temporary and not sustainable. However, this latest set of data has emerged after most shutdowns have ended, and show continued growth in users and engagement.
Potential Near-Term Catalyst
We believe a favorable decision in the Epic Games vs. Apple trial will greatly benefit Roblox Corp. If Epic Games wins out and Apple reduces their platform fee, this could result in higher margins for Roblox going forward. Roblox is the App Store’s highest grossing game, generating an estimated $3 million in daily revenue. With Apple’s 30% fee, this means Roblox Corp is paying over $900,000 per day to Apple. A reduction in Apple’s fee could potentially add a significant amount of profit to their bottom line each year.
We also believe a position in RBLX is a hedge against another COVID type lockdown. If kids stay home from school they inevitably spend more time on screens at home and a significant portion of that added time will be dedicated to Roblox.
Risks
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