Roblox is Officially Going Public: 3 Concerns

Roblox filed their S-1 right before Thanksgiving and is the latest gaming company to pursue an IPO. If you’re unfamiliar with Roblox, here is an overview video of the platform. Even with the ongoing pandemic, this has been a strong year not only for video gaming but also for the public markets as we’ve seen companies like Snowflake, Palantir, and Unity all list. In short, I think Roblox will mimic the recent success of Unity’s IPO, which is up +120% since it listed in September and currently has a market cap of $40B.

In 2020, Roblox was a key beneficiary of people (mainly kids) staying at home. In the first three quarters of 2020, here’s a few key stats:

• GMV (bookings): $1.2B (+171% y/y)
• Revenue: $588M (+68% y/y)
• Daily Active Users: 31M (+82% y/y)
• Engagement: 22B hours (+122% y/y) and an avg of 2.6 hours per DAU
• Creators: over 7M creators in 170 countries
• Creator earnings: $209M (+190%) across 960k earners, of which almost 250 creators earned >$1M.

While they operated at a loss of ~$200M YTD, they are currently sitting on $800M in cash prior to this IPO. Roblox has a thriving platform economy, incredible engagement metrics, and a vast user base of primarily kids under 18 years old. The company’s contribution to the gaming ecosystem is immense and it has paved a path forward for the future of user-generated content (UGC), a trend we are actively invested in here at Konvoy.

We have 3 main concerns with Roblox:

Amidst a flurry of enthusiasm for Roblox across the gaming ecosystem, it’s also worth highlighting a few concerns and points of caution. Below is one concern that Roblox highlights in their “risk factors” section, yet there are two others that I’d like to bring forward as well:

1) Child Safety: a risk that Roblox mentions in three separate “risk factors” revolves around the safety of the platform for children. According to the company filing, 54% of Roblox users are 12 years of age or younger and 67% are minors. This poses significant risks for a platform that emphasizes its focus on social features where users are able to seamlessly interact with each other. Roblox lacks any features to verify a user’s identity and also allows for multiple accounts per user. This makes it challenging for them to know who is interacting with whom. As a public company, this risk factor will likely come under far more scrutiny and any public reports of “bad actors” could create significant downside risk to the stock price and company as a whole.

2) Game Concentration: another major concern, one that isn’t mentioned in the S-1, is the over-concentration of the user base in just a few games. While Roblox is considered a platform, the majority of success comes from an incredibly small pool of their top games. Adopt Me, the most popular game on Roblox, accounts for roughly 23% of the concurrent player base. This is up from 2018 where the top Roblox game, ‘Jailbreak’, accounted for roughly 8-10% of all concurrent users on the platform (Ran Mo). When a platform is heavily focused on the social components, overconcentration is a risk to its core value as a broad platform for users to explore. Without a robust game discovery feature, active cross-promotion, or better incentives for smaller developers, Roblox risks looking more like a collection of just a few games than a broad and diversified platform.  

3) Age Demographics: today, Roblox is most popular amongst kids, as only 30% are over the age of 18. A major concern is the age “cliff.” Roblox needs to find a way to remain relevant to users as they grow older, likely through more advanced game mechanics, user interfaces, and cosmetic design. Similar to the console ecosystem, Roblox needs to focus on being a platform its players stay with as they get older. Xbox, PlayStation, and Nintendo have done a great job at building exceptional brands as platforms. Gamers that grew up playing console games are typically still playing on the same platforms they started with as kids. Roblox needs to make sure they focus on building that long-term relationship with its users, which can be monitored by watching the age demographics each quarter.

Takeaway: the success of Roblox is a key testament to the accelerating trend of user-generated content. That said, even incredibly successful platforms still have their risks. Here at Konvoy, we are actively investing in this space and believe that it is a key software layer for the future of video gaming (globally). Roblox is one of the first great success stories within this sub-vertical of gaming. ‍

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Unity (NYSE:U) - Q3 Results

Unity’s IPO in September was incredibly successful. The stock is up 120% and their market cap is now at $40B. This is a fantastic business that clearly exhibits how the technology companies within the gaming ecosystem can be some of the most valued investments in the space.

Recently, Unity (U) announced third-quarter results. Unity generates the vast majority of its revenue through its Operate Solution vs its game engine software. To paraphrase Unity’s CEO, John Ricccitiello, Unity views its TAM as being proportional to the total TAM of all of the users on the games developed through Unity. For developers, Unity only charges it's creation software and its monetization tools, but has no royalty payments (unlike Unreal Engine).

Unity generated $200.8M in revenue in Q3, up 53.3% from Q3 of 2019. The 2020 hits including Fall Guys and Apple’s Game of the Year, Genshin Impact, were both developed on Unity and utilize Unity’s Operate Solutions. On the Create Solution side, an important indicator of Unity’s continued adoption is the customers that generated over $100,000. This increased to 739 in the TTM, up from 553 for the TTM ending in Q3 of 2019.

Unity, by focusing its business model on the game monetization side (instead of the creation tool side), has benefited heavily due to the ongoing pandemic and increase in gaming. I’d expect Unity to continue to do well in Q4.

Takeaway: it’s interesting to see Unity’s focus on “Operate”, which isn’t merely an ad network but it resembles one. Also, they don’t share the number of “seats” for how many people buy developer licenses from Unity, likely due to the unnecessary volatility that would cause for the stock price. The data and analytics that Unity gives away to their creators for free is a good retention strategy as well.