Roblox started in 2004 but was first released in 2006. It is an online game platform and game creation system. In simple terms, it allows users to program and play games created by other users.

THE MARKET

It is no secret; the gaming market is growing fast for several years and isn’t losing its momentum:

1. According to Global Data, the gaming market was worth $ 130B in 2018 and is set to rise to $ 300B by 2025 for a CAGR of 13%

  • Mainly driven by mobile gaming and the advent of the 5G, cloud services and the rise in mobile e-sports

2. According to Brand Essence Research, the global digital gaming market was worth $ 135B in 2018 and is set to reach $ 391B by 2025 for a CAGR of 16%

  • Driven by the increasing penetration of portable gaming devices, live streams and e-sports

THE BUSINESS

Roblox enables any user to become a developer and create its own games, avatars and even tools for developers. But what does that mean?

1. What are Roblox developers?

  • Creators are the ones creating avatars and items players can use in games
  • Developers are the ones assembling games for other users to play with
  • Developers can also create tools and models for other developers to use when creating their game

2. Does that mean that Roblox is running on auto-pilot?

  • It literally built the “picks and shovels” and let its users create games, avatars and items other users can buy
  • It even lets its users create tools and models for other developers

3. Can really anyone become a developer?

  • Roblox now counts 31.1m Daily Active Users and it counts 7m developers
  • They got so many developers because it is not hard to turn yourself into a game developer

    “With Roblox, it’s super easy for anyone to jump in at a moment’s notice and start making something that’s fun to play without any prior game creation experience or knowledge. It’s that easy!” - David Jagneux for PCMag

4. Why would anyone become a Roblox game developer?

  • Gamers can purchase experiences and items for their avatar with Roblox’s in-game currency: “Robux”
  • 1,050 developers earned $ 10.000 or more and around 250 developers earned $ 100k or more in Robux
  • Developers and creators can then spend these Robux in other games or even cash out

Ok, great! But where is the money?

THE MONEY

Right now, we have a big market and a company that has an attractive business model: build a platform and let users build their own game, promote them and sell avatars, experiences, tools.

But what is their business model?

  1. Players buy Robux coins at an exchange rate of 1 Robux for $ 0.01
  2. Players spend these Robux on experiences and items (such as avatars)
  3. These Robux are distributed to the developers and creators
  4. Developers get from 30 to 70% of the Robux spent on their items, avatars, experiences
  5. Developers can then spend these Robux on other games. Or they can cash these out at $ 0.0035 per Robux

Financial minds will have spotted the interesting deals Roblox created for itself:

  1. Users pay upfront for their Robux but spend these over time - A boon for Roblox’s cash flows
  2. Roblox fixes the exchange rate and can reduce the appeal to cash out if it wants to

THE SUCCESS STORY

This strategy is working! Over 50% of kids in the U.S. play Roblox. What’s more?

  • DAUs grew 82% from 17.1m users in first 9 months of 2019 to 31.1m users in first 9 months of 2020
  • Hours engaged grew 122% from 10B hours in first 9 months of 2019 to 22.2B hours in first 9 months of 2020
  • Bookings grew 171% from $ 458m in first 9 months of 2019 to $ 1.2B in first 9 months of 2020

Big numbers! But who are their users?

  • 67% of their users are under 17 years old with 25% of total being under 9
  • 72% play on mobile, 25% on desktop and 3% on console
  • 33% come from North America, 29% from Europe and 15% from APAC

FINANCIAL CHECK

Note: Data concerns the first 9 months of 2020.

  • Revenue grew to $ 589m in 2020 from $ 349m in 2019 for 68% YoY Growth
  • Cost of revenue (servers and infrastructure) grew to $ 154m in 2020 from $ 82m in 2019 for 88% YoY Growth
  • Developers exchange fees grew to $ 209m in 2020 from $ 72m in 2019 for 190% YoY Growth
  • R&D expenses grew to $ 138m in 2020 from $ 74m in 2019 for 86% YoY Growth
  • SG&A Expenses grew to $ 107m in 2020 from $ 60m in 2019 for 78% Growth

Sales grew strongly year over year but there are some things we have to note:

  • Gross margins (taking into account cost of revenues) decreased from 76% to 73% in 2020
  • When adding “Developer exchange fees” (fees earned by developers), these margins decreases from 56% in 2019 to 38% in 2020

CLOSER LOOK AT FINANCIALS

However, we have to look at their “Bookings” in order to fully understand how Roblox reports its sales

  • Bookings grew 171% from $ 458m in first 9 months of 2019 to $ 1.2B in first 9 months of 2020
  • These bookings englobe all the dollars spent by its users during a period
  • But Roblox can’t recognize all of this cash as “Revenue” for 1 reporting period (3 months) as these will be spent by its users over time (on average 23 months)
  • This is perfect! Roblox gets all the cash today and users spend it later
  • Contributing very positively to their cash flows as FCF reached $ 296m in first 9 months of 2020 up from $ 6m a year earlier
  • Furthermore, average bookings per DAU increased significantly from $ 27 to $ 40 in 2020

GOING PUBLIC

Sounds like an interesting opportunity! What is the price?

BENCHMARK'S TAKE

The Good

  • Roblox provides the infrastructure and then lets its users build games, generate sales and promote their games
  • Roblox is selling Robux coins, set the exchange rate and has to distribute these only later, creating a very advantageous cash flow situation
  • The gaming market isn’t done growing and Roblox fits perfectly into the “mobile first” market that is now growing fast

The Bad

  • This may prove to be a fad and interest might dim over time as happened to manny blockbuster games
  • Roblox’s market is made up of underage gamers - these don’t have much spending power
  • Young users might “outgrow” the game and switch to other games as they grow older
  • Gaming market is moving fast. Businesses that have managed to thrive over time have managed to evolve with their offering to current demand

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.