Roblox (RBLX) - Worth Your Investment?

Roblox Corp (RBLX)

S/O: 526 million shares

Current Price: ~ $68

Market Cap: ~ $36 Billion

Company Profile:

"Roblox Corporation develops and operates an online entertainment platform. It offers Roblox Client, an application that allows users to explore 3D digital worlds; and Roblox Studio, a toolset that allows developers and creators to build, publish, and operate 3D experiences and other content. The company also provides Roblox Cloud, a solution that provides services and infrastructure to power the human co-experience platform. It serves customers in the United States, Canada, Europe, the Asia-Pacific, and internationally. Roblox Corporation was incorporated in 2004 and is based in San Mateo, California."

Retrieved from https://finance.yahoo.com/quote/RBLX/profile?p=RBLX

Financial Statements

 Pros:

Revenue – 924 Mil as of 12-2020 and trending upward since 2018

Revenue Breakdown by Region:

  • 69% of revenue comes from the US/Canada
  • 18% from Europe
  • 8% Asia

Revenue Breakdown by Virtual Items:

  • 13% comes from consumable virtual items
  • 87% from durable virtual items
  • -Difference between the two on page F-10 of S-1 Prospectus

GPM – 73.9%

Cash/Cash Equivalents – $894 Mil

Current Ratio – 1.20

 No Debt! Short or Long Term

  • Had a $50 M revolving line of credit, which they never used, and closed in Feb 2021

Cons:

Net Loss – 253 Million

  • Net losses has increased every year since 2018

Accumulated Deficit: $492.3 million

Operating Margin: -28%

3 Big Things that are preventing Roblox from being profitable.
  • Developer Exchange Fees – $328 Million
  • Infrastructure and Trust & Safety – $264 Mil
  • R&D – $201 Mill
  • Page F-14 of S-1 Prospectus

Total Liabilities: $2.1 Billion

  • Outweighs their total assets by $252 Million

 

 

Risk Factors

  1. The COVID-19 pandemic caused rapid growth due to children and teens being essentially quarantined to their houses. The question is, will the rapid growth continue after the pandemic is controlled and everyone returns to their daily lives? The company does not expect the rapid growth to continue and expects a decline in its current growth rate.
  • Their bookings increased 171% from Dec. 2019 to Dec. 2020
  • Never been profitable, Roblox does not expect to be profitable for the forseeable future.
  • Business is affected by seasonal demands. Historically their highest percentage of sales occur in Q4 "when holidays permit our users to spend increased time on our platform, and we expect this trend to continue." (Roblox S-1 Filing, page 17)
    • Read the risk factors from S-1 here.

MetaVerse and Competition

What is the metaverse? I'll let Steve Kovach from CNBC explain,

"It’s a concept that’s been thrown around in science-fiction for decades. The metaverse is difficult to understand unless you’re a huge geek, so let’s use the most accessible pop culture example. Imagine if the virtual world depicted in the novel and movie “Ready Player One” actually existed. That’s what Roblox is trying to build.

The real long-term goal for Roblox is to build a metaverse where millions (or billions!) can gather to take part in games, meetings, collaborative work and even Roblox’s own virtual economy fueled by its currency called Robux." (Kovach, 2021)

Roblox is looking to expand their virtual world, deemed the metaverse, but there are other big players looking to do the same thing. Most notably, Facebook, who has quite a significant lead in the virtual reality space and has a daily user base 38x as large as Roblox. Other companies that could be big contenders are: Epic Games, Minecraft (aka Mojang Studios), and (potentially) Apple. So how does Roblox fair in comparison to these other guys looking to create a digital universe for the real world to immerse themselves in? Let's take a look at each companies average daily user base to get an idea of who could dominate the metaverse market:

Average Daily Users: 

  • 37.1 Mil users - Roblox
  • 1.84 Bill users - FB
  • 31.3 Mil users - Epic Games
  • >1 Bill active iPhone users
  • Mincraft gets ~ 126 Million active players monthly (I could only find the monthly number here)

Not only does most of the competition sport larger user bases, but they also have a lot more money fueling them. I didn't look into Epic Games or Mojang Studios' revenue and profitability (because I was lazy) but we all know that Facebook and Apple have been profitable for years and have LARGE cash reserves and free cash flow to invest in virtual reality and creating their own "metaverse". Needless to say the competition in this space is going to be heavy.

My Opinion of Roblox Corp

I do think multiple metaverses can exist, but obviously the one that captures the most users will clearly dominate the space and generate the most revenue. Will that be Roblox? I don't know. If I had to guess who is dominating right now, I'd say Facebook, that is until Apple joins the chat.

I personally think that Roblox is overvalued and I could see its price dropping quite a bit, as Mr. Market realizes its true value. I would invest in Roblox if the price was right, but north of $60 is just not appealing to me. As always, do your own due diligence.

DISCLAIMER: I am not a financial advisor, just a guy with a blog who likes investing.

References
Roblox's S-1 Prospectus. https://sec.report/Document/0001193125-21-049767/#rom87104_3
Morningstar (Roblox Corp). http://financials.morningstar.com/balance-sheet/bs.html?t=RBLX&region=usa&culture=en-US

Kovach, S. (2021). Welcome to the metaverse, the sci-fi dream behind Roblox's $38 billion valuation. Retrieved from https://www.cnbc.com/2021/03/11/roblox-rblx-goes-public-with-a-bet-on-the-metaverse.html

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