ROBLOX CORP RBLX
June 19, 2021 - 6:53pm EST by
jgalt
2021 2022
Price: 81.00 EPS 0 0
Shares Out. (in M): 652 P/E 0 0
Market Cap (in $M): 52,900 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT 0 0

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  • Multi-bagger
 

Description

Roblox

 

I believe Roblox stock can compound in the high teens or low twenties for the next decade.

 

If you have no idea what I’m talking about, watch a short 4-minute video about what Roblox is:

 

https://www.youtube.com/watch?v=YU2pLJiptzA 

 

Roblox is a cloud-based, self-contained gaming/experience design engine. Users can log on and immediately start playing one of the games (I'll use the term games and experiences interchangeably; Roblox no longer calls them games because of the Epic/Apple kerfuffle). 

 

Creators can create any sort of experience and monetize them in various ways. [1]

 

The internal Roblox economy runs on Robux. [2] 

 

DAUs have grown from 11m in 2018 to over 40m today. [3]

 

The general way to think about Roblox: this is a platform with a double-sided network: users and developers. Each side reinforces the other: the more users, the more developers, who create more experiences and build more avatars, benefitting the users.

 

The financial model

 

It's helpful to look at bookings rather than revenue, since revenue is amortized over the average life of a user (23 months).

 

If the hairs on your back just went up you're not alone: is this a leaky bucket? Do they have to keep acquiring new users?

 

So far the evidence from the rising number of DAUs and growing monetization is an emphatic no. The company addressed this in their investor day (really worth watching) and said that over time they envision creating utility-like lifetime with more and better experiences. [4]

 

Bookings are a product of DAUs and ABPDAU (average booking per daily active user). This year we're expecting about 44m DAUs and $67 yearly ABPDAU for bookings of $2.9 bn.

 

The company is solidly profitable (on a FCF basis) having produced a double-digit FCF margin over the last 5 quarters and a 30% margin in Q3 3030 and Q1 2021.

 

I believe Roblox can grow to have many more users and that ABPDAU can keep growing. I’m modeling 274m and $114/year ten years from now, so bookings of ~$31 billion. That’s a high teens or low twenties IRR depending on your margin assumption.

 

Why they win

 

The founder, David Baszucki is a visionary and has been at it since 2004. He is totally committed to his vision. I don’t think this guy is a quitter, and you can tell from the long-term metrics in the S-1 that it’s been a slow grind. [5]

 

Roblox competes with every other source of attention (just like Netflix) but it’s special because the experiences are fun. There is no politics or misinformation. No ads (not in the traditional sense, but this is an area of growth). You can’t curse on the chat (the system picks up on curse words and blocks them). There is a huge safety and security team.

 

In the income statement you’ll see “developer exchange fees” which is what Roblox reverts back to developers who earn Robux through their creations. This is a key area of investment: what this means is that Roblox will keep forking over cash to developers to strengthen the ecosystem and I think this is the right strategy.

 

The company hosts an invite-only developer conference and you can watch the videos here (they’re useful). [6]

 

The bear case

 

The bear case is that this is a fad for 13 year olds and under. The retort is that the cohort of over 13 has been growing twice as fast (just run the math on the disclosed age groups in [3]).

 

The other bear case might be that they have no right to win because Facebook will crush them. The retort is… well, just look at Roblox’s numbers. They’ve been growing alongside Facebook. These markets tend to be larger than people can believe at first.

 

The elephant-in-the-room bear case is “what about Covid” and “won’t DAUs decline over the next few quarters?” It’s possible. The company reports metrics monthly and the stock sold off on the May numbers. 

 

But zoom out and look at this over the long term; Covid will be a blip in a few years. Yes, there may be short-term noise, but I’m willing to look through it.

 

[1] https://education.roblox.com/en-us/resources/adventure-game-monetization-earning-robux

 

[2] https://www.roblox.com/upgrades/robux

 

[3] https://s27.q4cdn.com/984876518/files/doc_financials/2021/q1/Q1-'21-Supplemental-Materials-final.pdf 

 

[4] https://www.youtube.com/watch?v=A1joSc0mRVg 

 

[5] https://www.sec.gov/Archives/edgar/data/1315098/000119312521075435/d87104d424b4.htm


[6] https://developer.roblox.com/en-us/resources/rdc

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

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