• Brett Schafer

Not So Deep Dive: Roblox Revisited



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Show Notes


(Ryan) What they do: Mission is to build a “human co-experience platform”. But basically Roblox is an online platform (primarily engaged with through mobile devices) where users can find games that have been built by developers. Roblox itself is not a game, but more of a virtual world where users can look to engage in different experiences that are created by other users. There are 27 million active user generated experiences to choose from and Roblox makes money through a take-rate on its in platform currency Robux.


It’s grown immensely popular with kids. 50% of US kids under the age of 16 played roblox in 2020 and ~3/4ths of kids age 9 to 12 in the US are on Roblox. If you’re trying to picture this in your head, the graphics look a little blocky but the experiences seem to be getting more and more realistic.


Last thing I’ll add is on the developer side. Roblox has more than 10 million users generating games. If you’re a good developer on Roblox, you can make a lot of money. And you choose how users pay for stuff in your experience. For example, one developer has sort of replicated GTA for Roblox. He could make it so users have to pay to get cool cars or something like that.


(Ryan) History: In 1989, David Baszucki developed a simulation software program used primarily for educational purposes and he built a company around it called Knowledge Revolution. He ran this company until 1998 and at one point Erik Cassel joined him there. However, they were bought out by a company called MSC software for $20M in 1999 and they worked there for about 5 years.


However, in 2004, both Erik Cassel and Dave Baszucki left to found Roblox. And they officially launched the product in 2006. They’ve evolved the platform little by little since then and Erik Cassel unfortunately passed away in 2013. And the company IPO’d last year, so March 10th 2021.


(Brett) Industry/Landscape/Competition:

  • Since it is a unique business, they say they draw on three different categories: entertainment, social media, and video games

  • Each of those categories has over $100 billion spent on it a year, and billions of users (essentially the potential user base converges to the entire global population over time)

  • Competitors: Mobile gaming companies, social networks like Instagram and Tik-Tok, YouTube, video/movie entertainment. They are competing for time spent on digital entertainment.


(Brad) Management and Ownership:


​​​​Founder and CEO is David Baszucki

- Looks like he has been a serial entrepreneur throughout his career

- Founder and CEO of Knowledge Revolution “which became the volume leader in educational physics”

- Founder of Baszucki and Associates which was an Angel Investing Firm

- VP and GM of MSC Software which was the “world’s largest vendor of mechanical simulation software” and bought Knowledge Revolution

- Then founded Roblox 17 years ago

- 88% glassdoor rating with 300 reviews

Chief Product Officer is Manuel Bronstein

- Been there for a year

- BOD at NYT

- VP of Google Assistant for 3 years and was a VP of Product at YouTube before that

- Former VP of Product at Zynga

- Former Director at Xbox

- But……. he worked for AOL.

Chief Business Officer is Craig Donato

- For VP of Biz development at Nextdoor.com -- led them to monetization

- Former VP at QVC

CFO is Mike Guthrie

- Been there for 4 years

- Former CFO of TrueCar

Ownership:

- Dave owns 100% of the class B and 1.7% of the class A float for 70.1% voting power

- Altos Ventures owns 7.1% of the voting power through a 23.6% stake in the class A float. Bought $350 million in stock in April 2020 from selling executives.

- Looks like Greg Baszucki owns 3.2% of class A as well who is his brother who helped him create Knowledge Revolution

- None of the mentioned executive have hefty stakes in the company

- Looks like institutions own most of the class A float



(Brett) Valuation:

  • Market cap of $37.29 billion, ticker RBLX

  • EV of $35.36 billion

  • TTM EV/bookings of 13.6

  • TTM EV/FCF of 58.9

  • Those are really the only things I’m looking at from a multiples perspective

  • 156 million in total dilutive securities vs. 578 million shares outstanding (this includes 57 million available under equity incentive program). Dilution could be 20% - 30% cumulative over next 5 to 7 years

  • However, they “only” have granted 8 million dilutive securities through first nine months of this year


(Ryan) Earnings:

  • Bookings for the first nine months of this year were $1.955B, up 58% YoY

  • Pay attention to bookings over revenue. There is a life that Robux purchases get recognized over but it isn’t truly indicative of the cash the Roblox is bringing in the door.

  • FCF for the first nine months was $481M

  • 36% FCF margins

  • THey do spend a hefty chunk on SBC though

  • 47.3M DAUs, up 31% YoY

  • Hours engaged were up 28% YoY

  • Bookings per DAU was down a little under 2% YoY (probably to be expected with international expansion)

  • APAC was their fastest growing region for users. Up 75% YoY, while US and Canada was up just 6% YoY

  • Users 13 and over is currently growing 48% YoY, where us 13U is growing just 20% YoY


(Brad) Balance sheet and liquidity:


- nearly $2 billion in cash & equivalents on hand

- Had a small line of credit that was fully undrawn and terminated last year

- Then raised $1 billion in senior notes at a nice 3.875% interest rate

- And free cash flow positive



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Anecdotal Evidence:

  • (Ryan) Watched some videos of different roblox experiences and they look pretty cool. I like the ones where it’s other digital media worlds basically replicated.

  • (Brett) I’ve downloaded it before and was lost right away. Watched part of the long investor day and the team seems very sharp. The stuff they are working on seems very hard technologically.

  • (Brad) Not much of a gamer outside of backyard baseball and NCAAF dynasty mode (RIP)


Future growth opportunities:

  • (Ryan) Hard to think of anything that Roblox themselves can do to spur growth. The platform itself manifests new opportunities all the time. Lots of brands are coming to Roblox to connect with users. NFL, Chipotle, Vans, to name a few. Idk how Roblox potentially monetizes that outside of their existing model. Ultimately, the most important thing for Roblox is maintaining engagement and growing users. But most of that is organic.

  • (Brett) Fashion. If you’re older this might seem strange (and it is) but the fashion stuff like Gucci Gardens and the British awards show that was put on are big monetization growth drivers for Roblox. Avatars are a huge part of the platform so it is no surprise people will pay for the luxury goods.

  • (Brad) Programmatic advertising. These new virtual worlds can be lined with billboards and brand sponsorships just like the real world is. Paging The Trade Desk – this would be an awesome partnership if it built something for it like it did for Walmart.


Highlights and lowlights:

  • (Ryan) Highlights: It’s a wonderful business all around run by a good manager. Flywheel, UGC, even a network effect to some extent. Lowlights: For those of you that follow Roblox closely there was recently an article that talked about some of the predators that use the platform. It sucks that that exists, and it can lead to sustainability problems. Don’t know what it takes, but Roblox needs to monitor that behavior. Other than that I don’t have many lowlights. I do have some questions that I want to try to answer further though, (1) Can Roblox evolve enough to attract older people? (2) How sustainable is the platform?

  • (Brett) Highlights: How they do everything with a vertical integration mindset, great cash conversion, and strong competitive advantage vs. anyone trying to build something similar (like YouTube, it will be winner take all). However, they still have plenty of competition in other forms of entertainment/gaming Lowlights: Average booking per player is down, the need to massively grow trust & safety spend (as opposed to a GTA Online or COD), DAUs stalling in US and Europe,

  • (Brad) Highlight is that this game has taken over an entire generation. Lowlight is that many games have done so in the past only to flame out over time as new content from new companies comes online. You have to remain in style and in fashion within this industry. Especially with Microsoft poised to own ATVI, competition is rich and fierce


Bull Case:

  • (Ryan) A few things I’d like to see by 2025: 100M total daily active users, steady average bookings per user, and 70% of the users being 13 or older. This could have 50% FCF margins.

  • (Brett) Can they grow internationally, age up, maintain engagement, and maintain monetization levels over the long term? If you can answer those four questions this can be a long-term “compounder”

  • (Brad) This game grows up with the younger Gen Zers and can continue attracting them with things like concerts and other gaming applications as they age while using the current young audience appeal it has to attract new consumers.


Bear Case:

  • (Ryan) The number one question every analyst seems to be asking is around age demographics. If they can’t attract older demographics to the platform, it limits the TAM. They could still grow, but probably not enough to warrant the current valuation.

  • (Brett) I think the only bear case is they can’t age up. If they do age-up, then this is a company worth hundreds of billions of dollars.

  • (Brad) The richest competition in the world all going after a piece of this space is able to take a large enough chunk that it places a lower revenue ceiling on Roblox than is currently assumed. MSFT FB stores and APPL GOOG falling take rates


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Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.

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