Roblox's Unique Business Model Offers Several Potential Growth Arenas

Roblox RBLX has experienced extraordinary growth by offering a virtual space known as the "metaverse" for tweens which is both a gaming playground and a social hangout. The stock is down more than 20% from its highs in early June when the video game platform company announced seemingly solid operating results for May. But its strategy to provide exclusive content to increase engagement is on track as it recently announced a new virtual hangout based on Netflix's NFLX hit series Stranger Things.

Brands Love Roblox

43 million daily active users and growing has a great appeal for brands and this is where long-term growth opportunity lies.

Brands are taking notice that Roblox userbase has drastically increased within two years Roblox is like a digital local mall from the 80s where teens gathered.

The latest collaboration with Netflix confirms its development as an entertainment platform. In its latest earnings report, it announced several brand partnerships, including Kering SA PPRUY's Gucci, the first luxury brand to create virtual items for Roblox. Stella McCartney, owned by LVMH Moet Hennessy Louis Vuitton SE LVMUY, is another luxury brand whose designers are making virtual merchandise based on real-world fashion. Roblox is using these branded experiences to grow the number of hours spent on the platform. This is a precursor to increasing revenue from the sale of its virtual currency, Robux, that users need to unlock new experiences on the platform.

The Figures

During the first quarter, average bookings per user grew 46% YoY as the figure amounted to $15.48.  In May alone, Roblox grew its daily active users (DAUs) by 28% over last year as it reached 43 million. At the same time, the company's revenue increased by 125% YoY as it amounted to $150 million. Those numbers are nothing short of extraordinary, but not nearly as high as the 138% per year revenue growth and 37% DAU growth the company witnessed in April. Also, DAUs fell by 300,000 from April to May.

Roblox's success secret is a traditional one: it provided the right service to a niche market at the right time. It provided a platform of games primarily for children when coronavirus lockdowns shut down schools- speaking of perfect timing. In 2020 alone, it added 5 million content creators and 50 million monthly active users. Its gaming platform hosts the most popular games among kids aged 5 to 12, who account for nearly 40% of its DAUs.

Trend Reversal Is Just Around The Corner

The positive momentum will soon reverse as kids in the U.S. and Canada go back to school as these are two of main revenue sources. Globally speaking and outside this age group, it is only the 66th most popular video game and the 55th most well-known in the U.S. Moreover, forty-six percent of people of all ages in the US have never even heard of it.

An unexpected drawback

On June 10^th, the National Music Publishers' Association, representing multiple music publishers, announced it would be suing Roblox for $200 million for alleged copyright infringement.  Roblox has a library of digital offerings that include 3-D models, skins, icons, and audio, uploaded by users and developers for community use. The audio part does include many copyrighted but unlicensed songs that are popular with the goal to enhance the gaming experience.

Its Strengths

To explain what Roblox does in simple terms is allow people without any coding experience to create video games on a simple platform. Creators get to share their games with other users and promote them on streaming platforms like Amazon's AMZN Twitch, while also being able to monetize them with in-game features or cosmetic upgrades for avatars. In order to pay creators, players buy Robux. Creators can covert the currency to U.S. dollars at a set exchange rate.

This self-sufficient cycle differentiates Roblox from other professional game development engines like Unity Software Inc U. It actually shares a few qualities with Microsoft Corporation's MSFT Minecraft.

Roblox has a highly scalable business model, is rapidly growing its revenue and earnings, and is reinvesting its cash flow back into R&D, prioritizing rewarding its developers at the expense of profitability. It impressed investors with its unique business model, robust growth rates, and lack of serious competitors. Moreover, it believes it can keep growing by gaining more overseas users. One of the most promising markets is China, where it partnered with Tencent Holdings Limited TCEHY, the world's largest video game publisher.

Outlook

While Roblox will face difficult YoY growth comparisons this year due to record engagement during the pandemic. The tell-all figure of engagement will be the spending per user. Robox is investing in the right things to motivate content developers to continue investing their time to create experiences on the platform, which Roblox needs in order to grow.

However, its overwhelming dependence on tween users is also a risk as it must constantly refine its safety measures to protect them from online predators, and be constantly on guard as those players grow older and possibly move on to other games.

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