Summary
- Roblox is focusing on gaming to build its metaverse. But, it has ambitions to build an all-encompassing metaverse.
- However, the company reported November DAU and Bookings metrics that disappointed the market.
- We discuss whether the stock will rebound to its November highs.
Investment Thesis
Roblox Corporation (RBLX) is recognized as a metaverse for younger gamers by global gaming giant Tencent (OTCPK:TCEHY). Therefore, there's no need to look too far ahead for investors who are thinking about Meta Platforms' (FB) metaverse future. As WSJ aptly put it,the metaverse is already here. From Second Life to Roblox, World of Warcraft, they are here. Roblox users can already experience 3D immersive experiences. The social community, the interaction, its economy, Roblox seems to have it all. Yet, some investors think that Web 3.0 and the numerous decentralized autonomous organizations compete to build their metaverse.
But, as Coinbase (COIN) Co-founder and CEO Brian Armstrong emphasized, Web 3.0 isn't a metaverse. Instead, he articulated (edited):
Web 3.0 will be about digital ownership within an open, decentralized environment.The metaverse is the distant evolution of Web 3.0. But, it’s not the same as Web 3.0. In its most complete form, the metaverse will be a series of decentralized, interconnected virtual worlds with a fully functioning economy where people can do just about anything they can do in the physical world. (Coinbase)
Interestingly, Coinbase also noted that nobody has successfully built the metaverse based on its vision. Tencent also acknowledged that we are still very early in the metaverse development journey, with multiple iterations yet to unfold. Meta Platforms has also acknowledged that the metaverse journey will be a multi-year project over the next ten to fifteen years. Therefore, readers should note that Roblox is still very early in its journey to build its version of the metaverse.
The recent growth-stock retracement has also battered Roblox stock. Moreover, sellers also took control after it missed its November daily active users (DAU) and Bookings estimates. Consequently, RBLX stock has fallen 17% since our previous Neutral rating, as we encouraged investors to be patient.
Therefore, we believe the time has come to revisit our RBLX stock rating.
Roblox and its Gaming Metaverse Ambitions
Notably, Coinbase highlighted that there wouldn't be just one metaverse. "There will be many Metaverses, and they'll be interconnected." Therefore, Roblox wouldn't be the only way (obviously) for investors to gain access to the metaverse opportunities. Nevertheless, Coinbase also recognizes that Roblox is one of the leading authorities in building their metaverse. Notably, COIN noted that Roblox is a gaming-focused platform that has achieved several key metaverse attributes. For example, Roblox is "virtual, massively scaled, persistent, and synchronous." However, the Roblox platform doesn't yet meet the attributes of "a fully-functioning economy, open and decentralized, and interoperable."
Therefore, Roblox still has plenty of opportunities to build upon its metaverse ambitions. We would have been surprised if Roblox had achieved all these attributes by now. Roblox is still very early in its metaverse opportunity, and we don't think it will happen in the next five years. It's a long-term project. eMarketer also emphasized that in "2022, each tech firmwill have its version of the metaverse." In addition, Bernstein emphasized (edited):
Despite the hype, the metaverse isn’t just a fad. It's an important concept for investors to understand when thinking about the longer-term growth prospects for many tech companies. We offer the metaverse as the next stage of the way we use the Internet, connectivity, and computing. (Barron's)
Notably, Bernstein also added that the metaverse is unlikely to be one where there is a "single open operating system," which involves total interoperability. Moreover, as Coinbase pointed out earlier, it also doesn't believe that it will happen. Instead, there will be multiple metaverses, and the tech world will find a way for interoperability. It highlighted blockchain technology as the critical enabler. We also observed that Meta Platforms' incoming CTO Andrew Bosworth also emphasized blockchain technology "could have profound impacts in our society over the next decade."
Crucially, we believe that Meta Platforms' metaverse ambitions will not conflict with what Roblox will achieve on the gaming front. We have a firm conviction that Roblox is one of the foremost leaders when building a gaming-focused metaverse. But, readers should note that gaming per se is not a metaverse but an activity that can be performed in the metaverse. Therefore, incorporating a gaming-focused approach is not exclusive to Roblox.
However, we believe Roblox's gaming-focused approach has set them apart from its gaming peers. First, gaming is a massive market. According to Accenture,there are 2.7B gamers worldwide. Its revenue impact is estimated to be $300B in total ($200B direct, $100B indirect). According to RTrack,Roblox has 226M monthly active users (MAU) in October, way ahead of Fortnite's 60M MAU.
Moreover, as highlighted by Sensor Tower, Roblox continues to be among the top gaming platforms. It's the #4 mobile game globally whose annual in-game revenue crossed $1B as of 14 December. It's also among the top ten mobile games worldwide based on November downloads across both the App Store and Google Play.
Even though its November DAU metrics may have disappointed the market, we believe investors should consider the long-term perspective. We think RBLX stock had very high expectations going into its November metrics, where it underperformed on both Bookings and DAU. The momentum spike from its post-FQ3 earnings was quickly digested by its November disappointment. Therefore, we were not surprised with the market reaction, but were waiting for this moment to arrive, where bad news hit the stock. Moreover, we believe monthly DAU and Bookings volatility has been a feature of RBLX for some time. We almost don't pay attention to monthly numbers as we think it's too volatile.
Moreover, Roblox has proven the resilience of its platform in FQ3. Investors should recall that the company reported an underwhelming FQ2 report card. But, FQ3's figures surprised to the upside. Therefore, it shows that investors need to take a long-term approach when evaluating Roblox's opportunities.
Roblox's Massive Advertising Tailwind
We believe that Roblox has a tremendous head start over the other gaming platforms in a gaming-focused metaverse. Roblox VP of Brand Partnerships Christina Wootton reminded us that "every brand will need a metaverse strategy, and the ones who have one are at the forefront." We have already seen how Roblox has benefited from fashion brands that are beginning to penetrate the metaverse through Roblox. Nike (NKE) createdNIKELANDrecently. "Ralph Lauren (RL) has partnered with Roblox to release limited-edition virtual clothing made by the legendary designer." Gucci (OTCPK:PPRUF) created its Gucci Garden experience earlier this year. The opportunity for fashion brands to lean into the metaverse is tremendous.
Fashion retailers are leaning in early because the profit opportunity is massive. They don't have raw materials and high labor costs or factories to run. Neither do they have to worry about overproduction or cost-overrun, which leads to margin compressions. They also do not need to send their inventory to discount outlets, which markedly impacts the value of their products. Moreover, their creativity can be unleashed on products that are impossible in the physical world. Bloomberg reported (edited):
Minting designs in the metaverse also opens up huge avenues of creativity. After all, the garments can look like anything a designer wants; the limitations normally imposed by market practicalities - or even gravity or logic - are gone. Any company with decades of archival designs can convert that intellectual property into a new revenue stream, reissuing pieces as metaverse-only. (Bloomberg)
Therefore, with advertising revenue still an insignificant contributor to its total revenue, we believe that advertising will be a massive tailwind for Roblox as more brands enter the Roblox platform. Readers should remember that the company has amassed well over 200M MAU. These users will age along well with the growth of the platform.
Roblox demonstrated in its FQ3 report card that its "over 13 years" age group has started to grow relative to its "under 13 years" users. We can observe from the charts above that its "over 13 years" users accounted for most of its total user engagement and DAU. The trend will likely continue as they grow with the platform.
Roblox CEO David Baszucki is also ramping up the company's opportunities beyond gaming (recall gaming is just one of the activities in the metaverse). In a recent interview, he emphasized that "he (has) a broader audience in mind. In the metaverse, people will take part in more mundane activities than hunting sharks. They'll attend town halls and industry conferences - gatherings where Roblox can offer something a Zoom call can't, mainly a third dimension in which participants can intermingle and explore." Baszucki emphasized (edited):
If we can do that, we would have a lot of the things people dream about in terms of making the metaverse feel like an everyday place to be. Yes, there will be volcanoes to flee and medieval battles to wage, but also corporate meetings and - gulp - remote-learning classes. We can dissect a frog together in high fidelity. (Bloomberg)
So, is RBLX Stock a Buy Now?
We have previously been lukewarm to Roblox's metaverse opportunity. But, after more in-depth studies into the metaverse future across several companies and themes, we have become convinced of what Roblox offers. Moreover, as we noted recently, Roblox stock is also one of Roundhill Ball Metaverse ETF's (META) most significant holdings. Therefore, we believe that the stock will exceed its November highs in due course.
Given that the stock's recent momentum spike has been digested, we believe the opportunity has arrived for us to consider adding exposure. We can't tell for sure whether the stock will continue to fall. However, its price is now within our fair value zone, and we think it's reasonable to assume a starter position. RBLX stock is highly volatile, so we don't think readers need to be too aggressive when adding exposure. It's perfectly fine to add over time as Roblox continues to prove its business model.
Therefore,we revise our rating on RBLX stock to Buy.
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