The most important game you've never played
Roblox is a game that most people without children have never heard of. Together with Minecraft, it is the game that the today's kids play before graduating to spend countless hours on Fortnite.
To be frank, calling Roblox a game is a stretch as the company primarily just provides a platform for players to build games themselves. According to the CEO David Baszucki 75% of the new hires do not even work on the game, but rather on the tools that allow players build the games inside Roblox.
Whether it is game or a platform is trivial, as Roblox has become so popular that it even decided to pull its IPO citing the absurd markets and difficulty of pricing its share . Yet this week, Roblox announced raising $520M at almost at a $29.5Bn valuation and while it still plans on going public, it is opting for the direct listing route at an undisclosed date.
As I was listening to The Prof G Show the other day it struck me how effective Roblox is reaching the very young demographic. Children between say 3-13 years old consist of a special and niche age group that is extremely hard to reach effectively. However, Roblox boasts 2 hours 36 minutes of active engagement per day , which is almost three times more than the daily engagement on Youtube. It implies that most if not all the time children of that age spend online should be on Roblox.
I began pondering if we could triangulate a value for Roblox assuming it becomes de facto way of targeting this young digital demographic? It'd be a fun exercise to conduct given Roblox’s valuation seem to obfuscate even the company itself. Although highly theoretical, it is a simple exercise with all inputs quite readily available. Essentially the value of Roblox would be the present value of the worldwide advertising spend spent on children. Let's see.
The back-of-the-envelope model
According to Statista , the worldwide kids advertising spend was ~$4.6Bn in 2020 growing ~4.6% year over year. More importantly, out of the $4.6Bn roughly $1.7Bn or 37% is digital spend. Knowing nothing of the number, I was frankly surprised that it’s practically nothing compared to the $500Bn+ global advertising industry. Then again, it does make sense given how little purchasing power we all had when were the size of a fire extinguisher.
To keep things simple, I will use a 10-year model with constant 4.6% year-over-year growth on the spend assuming that the digital channels will reach 50% of total spend. The discount rate can get highly theoretical, so for simplicity I use an arbitrary 10% - a nice round number. Now, all revenue comes with associated expenses, and thus I apply Roblox's latest gross margin of 77.7% on the spend and call it contribution margin. The "model" thus looks as below:
The $29Bn number I'm getting looks awfully similar to the valuation Roblox just raised in January 2021. It's crucial to understand that my number is an understatement given it excludes all other demographics (to be fair, Roblox claims 15% of its users to be 25+ years old... guys what are you doing?). Not to even mention Roblox's other revenue streams such as in-app purchases and what not. Indeed, this is a highly theoretical thought exercise but coincidentally seem to give a reasonable estimate on its fair value. Just shows how much art valuation can be and sometimes a simple back-of-the-envelop estimate is no worse than a complex one.
Onwards,
Joel-Oskar
