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Roblox’s Network Effects Puts It Into a Field of Its Own

Roblox (NYSE:RBLX) was co-founded by David Baszucki and Erik Cassel in 2004 and first released in 2006. These two men are what you call, “futurists” and “innovators.” They saw the future and a new form of online interaction far before anyone else. Between the growth it saw in 2020 and the company’s astonishing network effects, RBLX stock has the potential to be super performer over the next decade.

Roblox sign logo at headquarters
Source: Michael Vi / Shutterstock.com

Let’s take a deeper look at why you should consider the stock today.

A Quick Rundown of the Product

You have young kids and a pandemic hits. Your kids aren’t allowed to hang out with their friends in person and are now missing a crucial part of growing up: socializing.

Enter in Roblox — a free online platform where users can interact and play games with their friends or individuals that they meet on the platform stemming from over 180 countries. A parent may feel uneasy about having their young kid interact with a complete stranger, but Roblox has created a very safe and secure environment. In a hate-filled world that has become very divided, I believe that encouraging young kids to interact with other kids their age around the globe allows them to experience and appreciate different cultures.

More on the platform itself, when a new user joins the Roblox platform, they generate a username and avatar of their liking. The avatar features to choose from are designed by platform creators. The user then has over 18 million 3D experiences (games) created by the platform developers to choose from.

Roblox’s Network Effects

As these platform developers and creators build higher quality content and experiences, the more users become interested in using the platform. The more users that join the platform and become more engaged, the more developers and creators will be drawn in.

On the other hand, as users continue to encourage their friends to join and those friends invite others, a cascade effect of users begin to join the platform. A comparison I think fits well here is say Netflix (NASDAQ:NFLX) comes out with the latest and greatest show (i.e., The Queen’s Gambit). All of your friends are constantly talking about it. To be a part of the conversation, you begin watching the show, which leads to you chatting about the show with another set of friends. The number of people watching the show grows at a rapid pace as no one wants to miss out on the conversation.

This dynamic is termed, “network effects,” which is broken out into tow categories: direct and indirect network effects.

A diagram explaining how RBLX network effects work
Source: Thomas Logue

Roblox meets both of these categories as defined by Harvard Business School:

  1. “Direct network effects occur when the value of a product, service, or platform increases simply because the number of users increases, causing the network itself to grow.”
  2. “Indirect network effects … occur when a platform or service depends on two or more user groups, such as producers and consumers, buyers and sellers, or users and developers. As more people from one group join the platform, the other group receives a greater value amount.”

For reference, some notable companies deemed to have network effects: Amazon (NASDAQ:AMZN), Uber (NYSE:UBER), Facebook (NASDAQ:FB), Twitter (NYSE:TWTR), Snap Inc (NYSE:SNAP) and Pinterest (NYSE:PINS).

That’s certainly not a bad group of companies to be included in.

Roblox Currency: Robux

One of the most interesting things about the platform that also increases the intensity of the platform’s network effects is the platform currency. In this case, we’re talking about “Robux.”

Platform users can acquire Robux via their (parent’s) credit card and purchase items to design their avatar further or acquire items within specific games to improve their performance. As a result, creators/developers are paid in Robux, which can be exchanged for the U.S. dollar.

A stellar example of this is the story of a 21-year-old developer who became a millionaire by creating a game on the company’s platform where users could purchase vehicles and other items.

If you are an incredible developer and you see what is possible from a monetary standpoint by being on the Roblox platform, then you are that much more likely to join in on the action. As more elite developers join the platform, higher quality content/experiences are created thus leading to more users and more Robux being spent. It is truly incredible the depth of Roblox’s network effects.

2020 Growth

Through a combination of network effects and Covid-19, RBLX’s user growth and revenue exploded in 2020.

RBLX Annual Revenue and User growth 2019 and 2020
Source: Thomas Logue, data from RBLX investor relations page

In the below charts, you can see the direct effect that Covid-19 and lockdowns had on Roblox in the last three quarters of 2020.

Quarterly Revenue:

Roblox Quarterly Revenue
Source: Thomas Logue, data from RBLX investor relations page

Quarterly Hours Engaged:

RBLX Quarterly Hours Engaged
Source: Thomas Logue, data from RBLX investor relations page

Quarterly Daily Active Users:

RBLX quarterly daily active users
Source: Thomas Logue, data from RBLX investor relations page

Final Thoughts on RBLX Stock

Yes, growth won’t maintain a 90% year-over-year clip into the future. Furthermore, RBLX stock is currently trading at rather absurd valuations.

However, this shouldn’t detract from the fact that Roblox has a created a global platform with cream-of-the-crop network effects. Considering the monetary incentive, developers and creators will continue to join, grow and develop the platform. As a result, increasingly higher quality content will be built. This, in turn, will lead to robust user growth and spending.

The company’s prolific product, business model and network effects are just a few reasons why one should consider a long-term investment in RBLX stock.

As of this writing, Thomas Logue did not have (either directly or indirectly) any positions in the securities mentioned in this article.


Article printed from InvestorPlace Media, https://investorplace.com/2021/03/rblx-stock-robloxs-network-effects-puts-it-into-a-field-of-its-own/.

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