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Roblox’s plans to become the king of the Metaverse

November 22, 2021

Roblox. RBLX. Buy @ $134. Times recommended: 5. First recommended: $70 Last recommended: $107.50

Roblox is a platform on which developers can create and monetise experiences and consumers, many young but now embracing older age groups, can create avatars and explore the virtual worlds created by the developers. Roblox shares in this revenue so it concentrates all its efforts on improving the platform and driving engagement. The more developers and consumers engage with the platform the better the business does.

It is a powerful virtuous circle because more consumers attract more developers who create more experiences which attracts more consumers. At the same time the more money that flows into Roblox the more they can improve the platform which helps developers create even better experiences attracting even more consumers.

For years Roblox pootled along with nothing much happening under CEO and founder, Dave Bazrucki but around 2016 the business started to take off and has been growing with accelerating momentum ever since. I have just watched their recent Investor Day from beginning to end and was blown away by what is happening at Roblox and the quality of people making it happen. This is one phenomenally exciting company. My guess is that even those aggressive growth forecasts shown in the table below are going to be well beaten. The business shows all the signs of having passed a major inflection point with sales taking off.

Just one example of what is going on. Roblox was created for children between 9 and 12 to play and interact in a virtual world. But recent years have seen a rapid ageing up process with 17-24 year olds now the fastest growing demographic. This is making the platform increasingly attractive to brands like Gucci who have created a virtual world on Roblox called Gucci Garden. So far there are just a handful of brands on Roblox but visitor numbers have been incredible. One of the presenters at the Investor Day said she expected eventually that every brand in the world would be on Roblox!

After watching the presentation I can see why she would think that and my guess is that she is right in which case these guys really are just getting started. Especially since they expect something similar to happen in education with virtual classes in school hours not just as home work and in music where performers can make money from selling virtual merchandise known as virch. This is already selling so well that another presenter said he expected that eventually performers would make more money from selling virch than from streaming.

The is all part of the Metaverse phenomenon, which is already shaping up as the latest and greatest iteration of the Internet. No wonder Facebook has changed its name to Meta Platforms. There is something huge going on here. Roblox, which currently has some 50m active users, is already talking about reaching a billion users.

I was talking to my son-in-law who is becoming involved with this world. He was telling me that already there is the possibility of selling digital versions of luxury goods in these virtual worlds. These can be limited edition and because they do no deteriorate they will either hold their value or even rise in value. They may even become so costly and valuable that when you buy a digital version of say a bag you will be sent a physical version at no extra charge. You begin to see where Gucci Garden could be going and already visitors in the form of visiting avatars apparently feel exactly as though they have really been there.

I have seen forecasts of additional revenue of $50bn flowing through to the luxury goods companies as a result of these developments over coming years.

One of the presenters at the Investor Day was very young. He didn’t work for Roblox but had his own development business. Although I suspect he was still not 21 he already had 15 developers working for his company and engagement fees alone were generating around $100,000 a year for his business. He started when he was 14! There developers are already generating annual revenues in the millions of dollars with the total payments to developers in 2021 expected to exceed $0.5bn. This is up from $72m in 2018 which shows how fast the Roblox ecosystem is growing.

Even faster than the financial growth though is the rate at which the technology is improving. Roblox has over 1,000 employees and the vast bulk of them are working on research and development organised in some 60 teams. They do very well at attracting top talent because the work they offer is so cutting edge and exciting.

My image of Roblox is the blocky looking characters that don’t look remotely like real people moving around in cartoonish environments. There is still an element of that because that is what appeals to the sub teen audience. But the capabilities are changing with incredible speed so that avatars are starting to look and behave very like their real life counterparts.

One of the presenters was saying that with computer vision on your computer when you smile your avatar will smile and so on. How awesome is that and even that is just the beginning. According to my son in law we are heading for a future where your virtual life will be more important than your physical life and as Roblox says this activity in the virtual world comes with a dramatically lower carbon footprint.

It’s incredible really. My father struggled to make the video player work. What on earth would he have thought if I told him that I was going to have to learn to live in a virtual world. This, incidentally, is why Facebook has changed its name to Meta Platforms and why shares in semiconductor companies have been going through the roof. Can you imagine the computing power that is going to be needed to create a virtual world running in parallel to the real world, where maybe we all have avatars and when we go shopping online our avatars wander through virtual shopping malls trying stuff on, buying stuff for their virtual selves and sharing experiences with the avatars of their friends?

These are all things that the teams at Roblox confidently expect to happen. And we won’t be alone. We will have virtual pets and take our purchases to our virtual cars to drive back to our virtual homes. Clunky, boxy characters shooting at each other in cartoon environments is going to be as primitive to where this world is going as Stone Age man was to us. No wonder Roblox sales are exploding. This company really does look to be at the dawn of something amazing.

The shares too have exploded since the Investor Day on 16 November but this also reflects that the company reported its Q3 results on 8 November and these came in well ahead of expectations with sales increasing 102pc over what had been a very strong Q3 2020. Investors had been worried that after a lockdown boosted 2020 growth would tail off sharply in 2021 so were greatly reassured to see that this was not happening. The Investor Day came on top of that and means that since 8 November the shares have soared by 74pc.

No question the company is doing very well and morale is high.

Engagement is our north star. We’re very pleased that during the third quarter, people of all ages from across the globe chose to spend over 11bn hours on Roblox,” said David Baszucki, Chief Executive Officer of Roblox. “We are happy to report that the developer community earned over $130m in the quarter and is on pace to earn well over $500m this year. As we finish 2021 and head into 2022, we will continue to invest in innovative technology to enable our developer community to do what they do best – build and create.”

“Growth in all of our core metrics – DAUs [daily active users], hours, and bookings – displayed strong year-over-year growth despite lapping Covid-impacted periods and back-to-school seasonality,” said Michael Guthrie, Chief Financial Officer of Roblox. “Notwithstanding significant investments in developer economics and hiring, we also generated healthy cash from operations. Based on our October results, we appear to be having a great start to the last quarter of the year.

Another new feature being introduced on Roblox, one which the young developer presenter described as a game changer, is spatial voice.

“Spatial Voice is a feature that allows users to engage in voice chat within spatial voice experiences on Roblox. This feature is available for all users that are age verified 13 and older. 13+ age verified users can opt-in to use this feature by visiting their Settings page. They will then be able to use Spatial Voice Chat in any Roblox experience that supports it.” 

Another innovation is more clothing options.

“Shortly after RDC, [the Roblox Developers Conference held in October) we launched the Layered Clothing Studio Beta, which enables developers to apply any combination of clothing to the avatars in their own experiences and opens the door to greater possibilities for self-expression.”

Just note also what is happening to r&d spend at Roblox. This was $138m for Q3 2021 v $52m for Q3 2020 and $106m for the whole of 2018.

Roblox described the company’s growth strategies in the 2020 prospectus.

“We believe that the Roblox Platform has the potential to transform how people express themselves, socialize, play, learn, work, and transact together around the world. We are focused on the following key growth strategies: 

  Platform Extension:    We are continually investing in the Roblox Platform, including significant investments in high fidelity avatars, more realistic experiences, 3D spatial audio technology, and other social features. These investments should enable Roblox to support human co-experience in the entertainment, learning and business markets. For example, developers will be able to build and host virtual concerts, classrooms, meetings and conferences on Roblox.
 Age Demographic Expansion:    As a result of platform extension, developers, and creators are now able to build higher quality experiences and content that appeals to an older age demographic. We believe there is significant potential for us to increase our penetration and engagement across all age demographics. We ultimately aim to be a brand that serves all ages. An early sign of what is possible: our 17 to 24-year-old user age group grew faster than our core under 13 age group in the nine months ended September 30, 2020. 
  International Reach:    We believe there is significant potential for us to grow the global reach of our platform. We believe some of that will occur by the same organic, word of mouth user and developer growth that we have seen in markets like the U.S., Canada, and the United Kingdom. In addition, we are investing in technology that will also enhance our growth around the world. For example, we believe that features such as automated translation and built-in regional compliance will enable us to scale usage in global markets, allowing developers to publish in multiple languages and allowing users to communicate with each other even when they speak different languages. Further, we are addressing the opportunity in China through Luobu, a wholly-owned subsidiary of our joint venture with Songhua, an affiliate of Tencent Holdings Ltd. 
  Monetization:    We believe there is significant potential to increase monetization on our platform. First, we are actively working with our developer and creator community to help them improve their monetization. Second, we recently introduced our subscription service, Roblox Premium, which we believe will increase our conversion of our free users to paying users and the retention of our paying users. Finally, we expect to work with leading brands to build unique marketing opportunities on the Roblox Platform. To date, though we have not created meaningful monetization from marketing partnerships, each of Warner Bros Pictures, Netflix, NFL, WWE, Marvel, and FC Barcelona have introduced branded content on our platform.”

The ageing up process is increasingly important for Roblox.

A year ago, approximately 10pc of our top 1,000 experiences had more over 13 players than under. Recently, that number has gone to 28pc. So 28pc of the top 1,000 experiences are now more 13 plus. So the developer community is responding, creating amazing content for all ages, for people around the world, for interests.

It is easy to see how brands could become enormously important to Roblox.

Long term, the vision for brands is the exact same as games or play experiences in that we imagine an ecosystem where there are thousands and thousands of these experiences. They are created in concert between brands and possibly creators and developer communities.

But just as 16 years ago, games and play experiences were new on Roblox. This is relatively new for some of them. So there is some touch now. In our investor day next week, we’ll be sharing the parts of the road map we’re working on this year to make that as self-service as possible.

And that includes the creation, the way they deal with IP and assets, how they may, if they choose to, monetize. The high-level vision we have is just as print and just as video have been and continue to be interesting ways for brands to interact with their audience, immersive is a way for brands to interact with their audience. And as you noted with Vans World, which had over 40m visits, people who visited Vans World were able to wear Vans, go skateboarding, check out the shop, see what new items Vans had for sale. So it’s a really immersive way for brands to connect with their fans.

CEO, Dave Baszucki, had some interesting things to say about monetisation and the opportunity for advertising on the Roblox platform.

“I’ll speak on the advertising first, and I’m going to go more long view on this rather than the specifics. The long view is we have focused primarily to date on the engagement and the satisfaction of our users more than monetization on the platform. And we have built systems, including our virtual economy and engagement-based payouts, that has already created a very rich and vibrant developer community with large businesses, some of our developers making tens of millions of dollars a year.

Advertising is an enormous opportunity. And at the same time, our vision for advertising is immersive. It’s native. It’s around high-quality experiences.

And over time, we’ll be working on rolling out the standards around this, how this is supported globally. We do think there’s an interesting and big future and at the same time, a very high-quality branded advertising-type future. So super, super optimistic about that.

We see the same exact opportunity for brands and are in the very earliest stages of talking to brands about that. For now, they’re promoting their brands directly with the user base. I think it’s logical to all of us that eventually you would have a user who is not only interacting with a brand in a virtual world or even buying virtual goods, using maybe Vans, again, as an example, maybe has Vans closing on their avatars and ultimately saying they would like to own those shoes or their shorts or those T-shirts.

And so we see it as well. And we ultimately do think, in fact, it’s a big opportunity. Obviously, for the brand, it would take all of the returns of being on Roblox up to a different level. And so, yes, it’s — I don’t think there’s any doubt in the long run that’s where we’ll end up.”

Meanwhile there is the constant improvement in the connections with developers on the platform.

So when we think about this creator community, we’ve evolved over the last 10-plus years from a thriving hobby community to the introduction of our virtual economy, to individuals starting to make a living on the platform, to larger and larger studios making tens of millions of dollars a year, to now in the news a fair amount of VC funding of Roblox Studios to grow and accelerate. So that progression is an indication of the health of the community. We focus primarily on growing user engagement and the quality of that experience to grow the platform.

As our platform has grown year by year, whether it’s developer No. 1, developer No. 10, developer 100, or developer 1,000, we’ve seen constant increases in their participation in the economy. And we’re hopeful and we expect that to continue going forward.

So the primary means of retention for developers on our platform is a thriving, growing ecosystem, larger opportunities for developers, existing developers being more and more economically successful, and more opportunities for new developers. So I think it’s fair to say our retention is based on the long view, quality, size of opportunity, opportunity for dev rather than specific retention mechanisms. And that long view also goes to the quality of our toolset. It goes to the search and discovery built in the platform.

So the quality of what the developers are able to produce has yielded such great economics. A few years ago, in the third quarter of 2019, the entire developer community earned $26m. In 3Q of ’20, it was $85m, and in 3Q of this year, it’s $130m. So that’s five times in two years.”

And on the technological progress.

“We can see it now in the adoption of spatial voice among the experiences on Roblox as we carefully roll that out and open up the availability to the various customer base. We’ll talk more about this as well at our investor day, but we think this is a huge part of Roblox’ future, which is allowing people to come together in a natural way, especially in groups, especially at our Roblox company meeting, have impromptu conversations like they would in the real world and ultimately work, play and learn together.”

As subscribers know I use a mixture of price action and fundamentals to analyse stocks. When Roblox reported its Q3 results after hours on 8 November the shares which had closed that day at $77 exploded higher. They opened the next day at $99.50 and closed at $109.50. This left a gap in trading between $77 and $99.50. Not only is this a huge gap but the shares closed the day at a new all-time high above the peak reached in early June. Chartists call this type of behaviour a breakaway gap and it can be a sign that a massive move is coming. My best guess is that is exactly what is happening here. Roblox was floated on 21 March 2021 and its bull run began on 9 November. It is still less than two weeks old. These shares could be miles higher a decade from now.

The fundamentals could hardly be more exciting. Not only is the company growing fast and targeting rapid growth going forward but the story is electrifying. Below is another quote from the prospectus.

An average of 37.1m people from around the world come to Roblox every day to connect with friends. Together they play, learn, communicate, explore, and expand their friendships, all in 3D digital worlds that are entirely user-generated, built by our community of over 8m active developers. We call this emerging category “human co-experience,” which we consider to be the new form of social interaction we envisioned back in 2004. Our platform is powered by user-generated content and draws inspiration from gaming, entertainment, social media, and even toys.

Some refer to our category as the metaverse, a term often used to describe the concept of persistent, shared, 3D virtual spaces in a virtual universe. The idea of a metaverse has been written about by futurists and science fiction authors for over 30 years. With the advent of increasingly powerful consumer computing devices, cloud computing, and high bandwidth internet connections, the concept of the metaverse is materialising.

Incidentally, one investment bank, Morgan Stanley, was so impressed by the latest developments at Roblox that they raised their price target for the stock from $88 to $150.

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