3 reasons for Wall Street's revived interest in Roblox
In recent years, Roblox has gathered a significant following, with around 70 million users, primarily appealing to teenagers. The platform features a diverse range of games such as simulations, adventure, and user-generated content. This Thursday, Roblox will release their first-quarter earnings results, showcasing the company's capacity for future growth.
In the final quarter of 2023, Roblox reported revenue of $750 million, reflecting a 30% increase year-over-year. However, the company incurred a net loss of $323.7 million. The stock price has fluctuated between $25 and $45 since peaking at over $130 upon its 2021 public offering.
"Roblox has faced high operational costs, which makes it a challenge to sustain rapid growth," commented Matilda Beinat, a VR/AR analyst at ABI Research. Investors have questioned whether this simultaneous growth and cost maintenance is achievable.
Despite these challenges, analysts and investors maintain an optimistic outlook for Roblox. Here are three reasons why:
Dynamic revenue streams
Since its launch in 2006, Roblox has transformed its growth strategy. The platform allows users to play user-created games or create their own, as well as connect socially, forming friendships.
Roblox has ambitions for the platform to become a hub for real-life connections within the next five years. Last year, 19.7 million new friendships formed daily. This expansion is evident in the platform's daily usage statistics, with 2.5 hours spent daily by active users; figures continue to grow. Fifty percent of US teens, aged 12-17, use Roblox monthly, even as the platform gains popularity worldwide, particularly in Asia.
Hit games include Adopt Me! (a pet simulator), Brookhaven RP (a virtual town), and Tower of Hell. The platform attracts a predominantly teen audience, but Roblox is also working to attract and monetize older players.
This week, Roblox announced it would show immersive video ads to players over the age of 13. The company's stock value increased slightly in response to this announcement.
A new developer subscription feature allows developers to monetize their subscriptions by unlocking unique experiences. Analysts predict this could even further expand Roblox's user base across different age groups.
Brands & Risks
Brands are gravitating towards Roblox too. It saw over 300 brand activations in the fourth quarter of 2023, including from Ralph Lauren, Nike, Crocs, and Lego. Walmart has entered the Roblox metaverse, offering Roblox users the opportunity to purchase physical items and receive them through mail.
However, Roblox will need to avoid user backlash from excessive ads while continuing to attract brand involvement. "The company must strike a balance between potential 'easy revenue' and user experience," said Mike Proulx, research director at Forrester. "Advertising alone may not be enough to satisfy brands looking to engage with Roblox's young user base."
Advantageous Timing
Joining the wider trend, Roblox has embraced the potential of AI and XR (virtual, augmented, or mixed reality). In February 2022, it introduced a real-time AI chatbot, supporting 16 languages. Additionally, the company has plans to expand AI capabilities, allowing more users to become content creators.
XR (virtual, augmented, or mixed reality) is garnering increasing popularity, with major tech companies investing in the metaverse. "Roblox's growth aligns with the ongoing interest in AI and XR," said Matilda Beinat. "The company's future seems bright, assuming the right advertising strategies and timing."
Competition & Challenges
However, Roblox's primary rival, Epic Games' Fortnite, presents a significant threat. In February, Epic and Disney unveiled plans for co-created Fortnite content, utilizing Disney characters and franchises – posing a concern for Roblox's market share, particularly among older players.
Epic has been making inroads into Roblox's audience demographic, with a focus on older gamers. "Fortnite is making a serious attempt to eat into Roblox's market share," cautioned Lewis Ward, gaming director at IDC. "It's a crucial step for the competition, even though the Fortnite audience tends to be older."
Similar to Fortnite, Roblox is adopting a "reward for creators" approach to earning money. In the previous year, the company declared that makers who sell items and resources for other creators on its Creator Marketplace could retain all the income they generate.
"It's evident that Roblox is set to target younger gamers in 2024 and 2025," stated Ward.
"I believe this segment of gaming will continue to grow, and Roblox is primed to take advantage of this thriving 'gig economy'" trend, Ward continued.
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The tech industry is closely watching Roblox's business performance, with investors curious about its ability to balance rapid growth and high operational costs. Given its impressive user base and dynamic revenue streams, many tech businesses see potential collaborations with Roblox, making it an attractive prospect in the tech business sphere.
Source: edition.cnn.com
