Between Roblox and Meta, Who Can Build The Next Computing Platform?
$Meta Platforms(FB.US$ $Roblox(RBLX.US$ It will be costly and tremendously challenging to execute. Meta recognizes it, but we think they already have a highly profitable business to sustain its ambitious foray into the metaverse.
The company has highlighted that it would be investing substantially to build its metaverse infrastructure moving forward. As a result, the company expects a reduction of $10B in FY21 operating profit. Moreover, Meta guided that FY22 CapEx is estimated in the range of $29B to $34B. It is a significant increase from FY21's estimate of $19B.
Despite the heavy investments necessary, we think FB is exceptionally well-positioned to undertake these challenges. Whether they can succeed is another matter. However, the company has a very healthy profitability profile to pursue its highly ambitious metaverse project.
The company's core advertising platforms are still expected to be highly lucrative revenue and profit drivers. These estimates have not included the potential revenue that's attributed to the metaverse opportunity. At the moment, its revenue is estimated to increase at a CAGR of 18.5% by FY26. In a recent Trade Desk (TTD) article, we highlighted that the digital advertising market is still expected to grow rapidly. Worldwide spending is expected to reach $645.8B by 2024, representing a CAGR of 14%. Moreover, FB's global share is also expected to increase from 22.3% in 2020 to 25.2% by 2023.
Moreover, Meta's business generated so much free cash flow (FCF) that it even committed to a new $50B stock repurchase program. Despite the transitory headwinds Meta is facing due to the IDFA changes, it generated an LTM FCF of $35.81B. Its LTM stock repurchase also reached $31.5B. We think these incredible numbers are a testament to FB's credible ambitions to create the next computing platform. They have also communicated their intention to recruit 10K engineers in Europe to jumpstart its push.
$TENCENT(00700.HK$ also has ambitions on building its metaverse. However, it also recognizes that it's a "longer-term rather than an immediate opportunity." Moreover, it also acknowledges that existing social networks can also realize metaverse ambitions. Notably, it added:
We believe that we're one of really a handful of companies globally that have all of those capabilities in terms of the social network expertise, in terms of the experience managing online games, and in terms of the ability to take real-world assets and digitize them for Metaverse purposes. (from Tencent FQ2 earnings call)
Hence, even Tencent emphasized that only "a handful of companies" have the necessary capabilities to build a true metaverse. It's beyond just metaverse-like experiences. We think Meta certainly is one of these companies with the essential capabilities and resources.
How about Roblox? Roblox is a leading mobile gaming leader among iOS users. Based on Sensor Tower Q3 statistics, Roblox was ranked third worldwide in terms of downloads on the App Store. Roblox and Fortnite are the leading metaverse-like gaming platforms. Roblox's well-diversified UGC platform is more prevalent among children, while Fortnite focuses on the battle-royale shooter genre. In addition, Roblox's focus on immersive experiences has brought tremendous success.
Roblox's popularity as a gaming metaverse has been well recognized. It's why the stock trades at a much higher premium than the rest of its gaming peers, such as Electronic Arts (EA) or Activision (ATVI). It has also grown its user base rapidly. Its daily active users (DAU) increased from just 17.1M in FQ2'19 to 43.2M in FQ2'21, representing a phenomenal CAGR of 58.9%. However, there are concerns over slowing user growth, as DAU increased by just 2.6% QoQ.
However, the company's August update put to bed those concerns. Roblox reported that its DAU was up 32% YoY in August as it reached 48.2M. It was also 3.4% higher than July's 46.6M DAU. We remain confident that Roblox's recent update underpins the strength of its popularity. Therefore, we are satisfied that the platform's growth is still in its early innings.
Its successful adaptation of $Netflix(NFLX.US$ highly successful South Korean series, Squid Game, has also been well received. Even though its gameplay looks simple, it seems to be a huge hit. One user even commented:
I used to think Roblox was a game reserved for children who have yet to see the greatness of Minecraft. But after dipping my toes into the world of this free-to-play universe and how simple yet fun it can be, I now know why people are hooked. Couple that with the trending Squid Game sensation and you've got a recipe for a viral hit.
We think Roblox has a highly robust creator universe. It's one of the critical competencies of the Roblox platform. Therefore, it bodes well for the company's gaming metaverse mission. Notwithstanding, we are not sure whether Roblox has the capability and resources to create the true metaverse. Unity even called the metaverse a "revolution." It emphasized: "The metaverse is going to be the biggest revolution in computing platforms the world has seen-bigger than the mobile revolution, bigger than the web revolution."
Roblox has been growing its revenue rapidly. Its revenue grew 116% YoY in FQ2'21. However, its operating margin remained mired in the red. Operating leverage has been elusive for the company despite its phenomenal revenue growth. As of FQ2'21, Roblox reported an LTM operating margin of -24.8%.
Roblox pays a substantial portion of its revenue to its developers. It makes sense since Roblox is a UGC platform. However, it has also hindered the company's ability to turn an operating profit. Moreover, its share of total revenue remains at a high amount. In FQ2'21, its share of total revenue was 29%.
Even though Roblox is FCF profitable, it is mainly dependent on its growth in deferred revenue. Despite posting operating losses, its robust growth in deferred revenue has kept Roblox FCF profitable. However, we also emphasized that: "This necessitates the company to keep growing its bookings rapidly to offset the huge operating expenses in order keep it FCF positive."
It meant that Roblox would need to keep maintaining its gangbusters growth in its bookings to sustain its higher developer fees. However, we saw a noticeable dip in FQ2 on its LTM change in deferred revenue. RBLX reported an LTM change in deferred revenue of $1.07B, a marked decline from FQ1's $1.15B. It demonstrated that Roblox seems to be experiencing a probable deceleration in bookings growth.
Bookings' growth is integral to the health of its FCF growth for Roblox. We can easily observe from the trend of its cash from operations and FCF. Therefore, a slowdown in bookings growth must be carefully monitored moving forward.
We can also easily observe that Roblox cannot undertake the scale of FB's massive undertakings to build the next computing platform. Despite a solid net cash balance, it's still EBIT unprofitable. Moreover, its FCF health is underpinned by the assumption of continued robust growth in bookings. In contrast, Meta already boasts of a highly profitable business model. It's also generating a considerable amount of FCF. Moreover, it operates a wide-moat business model and is expected to strengthen its clout further in the digital advertising market.
Therefore, we think there's little doubt that Meta is much better primed to take on the challenge of building out the true metaverse. It would be interesting to see how FB's metaverse would be differentiated against Roblox. Perhaps, both platforms could be interoperable in the future. Meta can't do this alone. If they want to overturn the dominance of $Apple(AAPL.US$ and $Alphabet-A(GOOGL.US$ in mobile internet, they would need participation from other companies and developers.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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Johnny Thunders : Thank you, Great article. Worthwhile listening to RBLX CEO’s podcast seriesto understand just how under appreciated their technology stack and ambitions are. Plenty of room for both in one’s portfolio…along with UNITY. On a side note, would love to see META acquire ReadyPlayerMe and/or MTTR.
Gonna be a fun ride!
Sacai Luis Johnny Thunders: Agreed. U should be included in this conversation.
Sacai Luis : Tencent may be the best positioned at this time given it's significant and deep expertise/footprint in both gaming and social (along with other areas i.e. fintech), though it has its own baggage being a China domiciled company