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Roblox stock: Analyst explains 3 ways the company is monetizing its platform

Needham & Company Managing Director Bernie McTernan joins Yahoo Finance Live to discuss Roblox stock, market volatility, and the outlook for the food delivery space amid Amazon’s Grubhub partnership.

Video Transcript

[MUSIC PLAYING]

- Roblox shares are still seeing a lot of interest on Yahoo Finance after the stock rallied 14% on Tuesday, despite broader market volatility. Shares in the online gaming platform are still down over 60% year to date, though. Joining us now for a deeper dive into the company is Needham and Company managing director Bernie McTernan. Bernie, always great to see you. Look, Roblox shares up 16% so far in July. What's going on here?

BERNIE MCTERNAN: Yeah. Well, I think you have to look at the broader picture, too. I mean, this is a stock that was down-- you know, if you look back to November, it's down 50% still. And really, what happened is-- what we think happened is that, if you look at when they reported their May results, the stock's up 50% since then. Part of that is the group bouncing, too. So over that time period, our coverage group, which includes a lot of marketplace names like Roblox in gaming, up about 15% over that time, versus the broader market up 4%.

So Roblox definitely outperforming. And I think it's-- part of it was that the third-party data that we had been hearing about all pointed to a really negative May. That catalyst for the shorts kind of came and went. So then the question is, what are you playing for next? And really, we think there's going to be improvement in the second half of the year as comps begin to normalize post-COVID. And hopefully-- and we expect to be looking at about, you know, high teens, maybe even low 20s bookings growth into 2023.

- Outside of potentially more upbeat bookings data and some monthly data that they report, is there any specific initiative coming from Roblox, let's say over the next six months, that you're excited about?

BERNIE MCTERNAN: Yeah. Yeah, three things that the company pointed to on their last earnings call that was really an about-face for them in terms of how they're leaning into monetization. So first, that's search and discovery, as they're adding all this aged up content, making sure the right people are getting suggested the right content. Think Netflix with that. You know, the Netflix algorithm is so powerful. Roblox is building and going to be rolling out the same kind of thing, even better.

Number two, advertising. This is longer than a six-month opportunity. This is probably a '23 or 2024 event for the company. But we think it's a massive opportunity. We factor in hundreds of millions of dollars over the course of a few years into our base case. We have them reaching over a billion dollars of advertising revenue in our bull case. We think this is a really exciting modernization opportunity to really help, you know, match the level of engagement with the monetization that's on the platform.

And three, it's their UGC, or user-generated content marketplace. That's clothing for avatars. Historically, that's all been done in-house by Roblox. They're opening that up now to users to build it themselves. You know, and that's really what drives Roblox to be so popular, is that the users are building the games now. They have the opportunity to build the clothing and different accessories through the avatars. And we think that's a big opportunity, too. And so again, it's what-- what are we excited about? It's the company is really leaning into-- to monetizing their hours of engagement.

- And so for those monetized daily active users, how do you perceive that a company Roblox may fare in an environment where the consumers aren't as confident with the dollars that they are spending, even in a virtual or entertainment type capacity?

BERNIE MCTERNAN: Yeah, look, in a discretionary type environment-- sorry, in the recessionary type environment, discretionary goods should take a hit. One thing that will be particularly interesting is that a lot of habits changed during the pandemic, whether that's ordering in, whether that's using mobile games more. You know, so we're really trying to take a view of that not just everything is discretionary, and so that's bad, but there should be relative winners and losers. And so Ro-- you know, so take out, for example, in DoorDash, we think that will probably hold up better than we originally anticipated, just some of the survey work that we've seen out there pointing to consumers indicating that's more of an inelastic good, or something that they're less willing to cut versus, say, going to a restaurant.

Answering the question of Roblox specifically, monthly active payers pay about $20 per month for the platform. So it's not-- it's not a huge monthly expense for a household, but I certainly expect that would be under some pressure. And that's why these other initiatives are so important, search and discovery to make sure users are engaging with the right content, but then advertising to make sure that just a whole new opportunity for them, and then the marketplace or the avatar clothing that gives-- that gives users another avenue to engage with the platform and to spend on.

- Bernie, you mentioned DoorDash. That stock got hit on the Amazon-Grubhub partnership. How big a headwind is that partnership going to be to DoorDash?

BERNIE MCTERNAN: Yeah, so I think a key thing to remember-- so first off, bad headline, right? So bad headline for DoorDash, bad headline for Uber. What will the actual impact be? Our view is that we suspect-- and there's been no press reports on this, this is just the way we think this is probably happening-- is that Door-- Grubhub approached Amazon from a position of relative weakness.

This is a company that got bought for $7 billion two years ago. Grub-- Just Eat Takeaway has been trying to sell it. The asking price is now closer to a billion dollars. The company is-- you know, threw a Hail Mary a couple of weeks ago or months ago with the $15 free lunch. We think that they're in a tough spot. So approaching Amazon was probably-- I would imagine Amazon got a pretty sweetheart deal in terms of the relative split, that, you know, that $10, who's subsidizing who.

But then the only other thing is that Grubhub also said they don't expect a major impact to their earnings-- or neutral to earnings and free cash flow this year. So what that tells us is that we just don't think that they're really going to be going after those subscribers really hard. And so if that's the case and they're not able to get a couple million subscribers, I just don't think it's going to be a big impact to DoorDash or Uber.

Now, that said-- so that's kind of like the short-term, 2022 impact. Is this the first step, though, in Amazon really competing in the restaurant space again? And so that would be the major negative that would come out of this. You know, this is an opportunity for Amazon to check out, see what's under the hood. They're going to have a 2% stake in Grubhub. That could work its way up to 15%.

So Amazon could choose to-- you know, if regulatory worked out in their favor, they could choose to buy Grubhub, potentially, if they wanted to go down that road. They could do it themselves, if they wanted to. So this will be a huge topic of conversation that we're focused on, not only this earnings period, but for the next year. And as of now, you know, look at the-- it's only been 24 hours, but if you look at the Amazon home page, I haven't seen Grubhub Plus once, in terms of what they're pushing. So it's one thing for Prime members to get it for free. It's a whole other thing for Prime members to actually know it's out there.

- Yeah, they've been very strategic in those partnerships over the years at Amazon. Just briefly, and I'm sorry to go backwards here, Bernie, but in something that you mentioned in terms of a growth imperative, perhaps, for Roblox. You mentioned advertising. This is a time period where we know that companies are pulling back on some of their marketing, their advertising spending.

But if you are Roblox, you need to go forward with this anyway, right? Because what is the growth prospect if you don't at least introduce it right now? How does that hit on some of the growth prospects for a company in Roblox if they don't at least introduce it so that it is available for when companies start to increase their marketing in the future, post recession, if you will?

BERNIE MCTERNAN: Yeah. I think what's really interesting is that we're seeing a lot of brands test and experiment, you know, within metaverses more broadly, whether it's Roblox or Fortnite. But so the brands are working on that now, whether that's, you know, Nikeland or Polo. There's more than a handful of brands who are testing with Roblox experiences. So I think that that's-- that's the key, is that they're not just-- it's not going from 0 to 100. They've been working with brands and creating-- and allowing them to experiment.

And so the next phase would really just be able to allow more immersive experiences within advertising to-- you know, and there's a lot of different companies working on this in the mobile gaming space more broadly, to really make a seamless experience so that you're not-- you know, so it's not just a ban-- like in the traditional mobile game, where it's like the banner ad or the ad that takes up the whole screen, to really have it to be-- to be more immersive. And so I think that that's the key here, is that brands are already working with Roblox to experiment, and this is just the next continuation of it.

- Bernie McTernan, who is the Needham and Company managing director, appreciate the time and the conversation here today, Bernie. We're going to check back in later on.

BERNIE MCTERNAN: Great. Thanks for having me.

- Definitely.