Roblox hinted at another robust quarter, but competition looms in the metaverse.
A few weeks of improving trends give Roblox Corp. investors. hope the worst of the gaming platform’s post-pandemic slowdown is now behind us. They may want to pause on that idea.
Roblox — known to parents everywhere as the cultural phenomenon whose virtual playgrounds have captivated their kids — released predictably solid results late Monday (before responding to the analyst earnings call early Tuesday). The company’s bookings — the industry’s leading measure of sales — were up 28% from a year earlier to $637.8 million for the quarter ended September, and daily active users for the period were up 31% to 47.3 million.
But what caught the market’s attention was a sign that the current quarter would not see as strong a post-pandemic growth slowdown as expected. For the first 27 days of October, before an unusual three-day outage at the end of the month, daily active users shot up 43% year-over-year. The healthy rise surprised Wall Street, which had expected Roblox’s growth rate to slow significantly as users are no longer confined to their homes due to the pandemic. Shares shot up more than 30% on Tuesday morning.
But do the October numbers mean the bottom has been reached? I’m not so sure. For starters, it will be challenging to hold on to pandemic-level profits regardless of what the month of October has delivered. Roblox’s growth rate is still significantly slower than its pandemic peak, when it nearly doubled its user base each quarter, and I expect several more quarters of headwinds as the pandemic subsides and kids and adults spend more time outdoors and less time online.
The valuation of Roblox is already hovering in the nosebleed area. As of 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. By comparison, Activision Blizzard Inc., the largest U.S. video game publisher, is estimated at 17 times its 2022 earnings estimates.
Looking further, the company faces increasing threats from tech giants, including Facebook parent Meta Platforms Inc. and video game publisher Epic Games Inc., both of whom are competing to build metaverse environments — digital worlds where users can socialize, play games, and behave. 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 create more games and virtual items to sell, Roblox attracts more users, which in turn attracts more developers.
But the early advantage will be hard to sustain. It’s only a matter of time before rival Epic uses its large Fortnite user base to build a similar user-generated creator model. In addition, Epic’s more advanced graphics technologies in the Unreal programming engine provide a better immersive experience compared to Roblox.
Then there’s Meta. Last month, Chief Executive Officer Mark Zuckerberg indicated that he plans to put billions of dollars into his vision for the metaverse. While Zuckerberg’s ambitions face huge hurdles of their own, the massive investment will make it harder for Roblox to attract top game makers and recruit engineers for its platform. The recent outage of Roblox was a reminder of the importance of top tech talent.
With the difficult growth prospects, intensifying competition and heightened valuation, Roblox is not out of the woods. I wouldn’t get too excited just yet.
Tae Kim is a Sirbpti Opinion columnist on technology. He previously covered technology for Barron’s, after a previous career as an equity analyst.