Roblox Investors Could Be Playing a Dangerous Game
(Bloomberg Opinion) -- A few weeks of improving trends is giving hope to Roblox Corp.’s investors that the worst of the gaming platform’s post-pandemic slowdown is now behind it. They might want to hit pause on that notion.
Roblox — known by parents everywhere as the cultural phenomenon whose virtual playgrounds have captivated their children — posted predictably solid results late Monday (before following up with its earnings call for analysts early Tuesday). The company’s bookings — the industry’s primary measure of sales – climbed 28% from a year earlier to $637.8 million for the quarter ended in September, and daily active users for period rose 31% to 47.3 million.
But what seized the market’s attention was a sign that the current quarter wasn’t going to see as much of a post-pandemic growth slowdown as anticipated. For the first 27 days of October, before an unusual three-day outage at month’s end, daily active users shot up by 43% year-over-year. The healthy increase surprised Wall Street, which had expected Roblox’s growth rate to slow markedly now that users were no longer confined at home due to the pandemic. Shares skyrocketed more than 30% on Tuesday morning.
But do the October figures mean the bottom is in? I’m not so sure. For starters, it will be challenging to sustain pandemic-level gains, no matter what the month of October delivered. Roblox’s growth rate is still down significantly from the pandemic peak, when it was nearly doubling its user base each quarter, and I expect headwinds for several more quarters as the pandemic ebbs and children and adults spend more time outside and less time online.
Roblox’s valuation already is hovering in nosebleed territory. At Monday’s close, before the earnings announcement, the company was valued at nearly $45 billion, with the stock trading at 177 times next year’s consensus earnings. For context, the largest U.S. videogame publisher Activision Blizzard Inc. is valued at 17 times 2022 earnings estimates.
Looking further out, the company faces rising threats from technology giants including Facebook parent Meta Platforms Inc. and video-game publisher Epic Games Inc., both of which are vying to build metaverse environments — digital worlds where users can socialize, play games and conduct business — that will challenge Roblox’s early lead in that arena.
Roblox has built an impressive, self-sustaining ecosystem of millions of creators and tens of millions of gamers. As developers make more games and virtual items to sell, Roblox attracts more users, which then draws in more developers.
But the early advantage will be hard to sustain. It’s only a matter of time before rival Epic leverages its large Fortnite user base to build a similar user-generated creator model. Plus, Epic’s more advanced graphics technologies inside its Unreal programming engine stand to offer a better immersive experience compared with Roblox.
Then there is Meta. Last month, Chief Executive Officer Mark Zuckerberg has indicated that he plans to plow billions of dollars into his vision of the metaverse. Even though Zuckerberg’s ambitions face daunting obstacles of their own, the massive investment will make it harder for Roblox to attract top game makers and recruit engineers for its platform. Roblox’s recent outage was a reminder of the importance of having top tech talent.
With the tough growth outlook, intensifying competition and the elevated valuation, Roblox isn’t out of the woods. I wouldn’t get too excited just yet.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tae Kim is a Bloomberg Opinion columnist covering technology. He previously covered technology for Barron's, following an earlier career as an equity analyst.
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