Roblox (RBLX 1.60%) and Activision Blizzard (ATVI) are two very different types of gaming companies. Roblox's platform enables its users to create and share their games with others, while Activision is a traditional game publisher that develops PC, console, and mobile games.
Both companies generated accelerating growth throughout the pandemic as people stayed at home and played more video games. But both companies will also likely face tough year-over-year comparisons after the crisis finally ends.
Roblox went public via a direct listing on March 10. It started trading at $64.50, closed at $69.50 on the first day, and now trades in the high $70s. Activision's stock has rallied about 30% over the past 12 months, but it's only advanced about 5% since Roblox's market debut.
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Many investors might avoid both Roblox and Activision as the market rotates from growth to value stocks, but it would be myopic to dismiss their long-term strengths. Let's take a fresh look at both companies to see if the disruptive new challenger is a better bet than the grizzled industry veteran.
Is Roblox a fad or a sustainable business?
Roblox's platform lets people create video games without any coding experience. Its creators can share their games with other users or monetize them with in-game features and cosmetic upgrades for avatars.
These in-game transactions are funded by its in-game currency, Robux, which developers can trade back for U.S. dollars at a set exchange rate. Roblox players can get discounts on Robux and other digital perks if they sign up for monthly subscriptions.
The bulls claim Roblox is a self-sufficient gaming platform powered by younger creators. More than half of its daily active users (DAUs) are under the age of 13. It dominates this growing niche and isn't directly comparable to developer-oriented game engines like Unity.
Roblox's growth rates support that thesis. Its revenue soared 82% to $933 million in 2020, then jumped another 140% year-over-year to $387 million in the first quarter of 2021. It ended the quarter with 42.1 million DAUs, up 79% from a year ago, as its average bookings per DAU increased 46%.
However, Roblox's net loss more than tripled to $253 million in 2020, then widened year-over-year from $74 million to $134 million in the first quarter. Its biggest expenses include infrastructure costs and "developer exchange fees," or the cost of exchanging its Robux back to U.S. dollars.
The bears argue that Roblox can't narrow its losses without reducing Robux's set exchange rate, which could in turn alienate its developers. Its revenue growth could also decelerate after the pandemic ends. Analysts expect Roblox's revenue to rise 183% this year but increase just 19% next year.
Activision Blizzard is diversified and profitable
Activision Blizzard's revenue rose 25% to $8.08 billion in 2020, and grew another 27% year-over-year to $2.28 billion in the first quarter of 2021.
Activision Blizzard operates three business segments: Activision, Blizzard, and King. At the end of the first quarter, Activision had 150 million monthly active users (MAUs), Blizzard had 27 million MAUs, and King had 258 million MAUs. Activision's MAUs increased 47% year-over-year and offset its declining MAUs at Blizzard and King.
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Activision grew as its flagship Call of Duty franchise fired on all cylinders across multiple platforms. King, the mobile developer it acquired five years ago, also generated stable growth as players kept playing Candy Crush throughout the pandemic.
Blizzard generated weaker growth throughout most of 2020 as aging games like World of Warcraft, Overwatch, and Hearthstone attracted fewer gamers. However, expansion packs for World of Warcraft and Hearthstone breathed some life into the lagging division over the past two quarters.
Unlike Roblox, Activision remains consistently profitable. Its net income increased 46% to $2.2 billion in 2020, then grew another 23% to $619 million in the first quarter of 2021.
Analysts expect Activision's revenue and earnings to rise 5% and 9%, respectively, this year. That would mark a significant slowdown from its pandemic-fueled growth last year, but analysts also expect its revenue and earnings to grow 14% and 18%, respectively, in 2022.
Its recent launch of Diablo Immortal for mobile devices, a new Call of Duty game, the eagerly anticipated sequel to Overwatch, and new Candy Crush games could all stabilize its growth in a post-pandemic world.
The valuations and verdict
Roblox might seem like a promising growth stock, but it isn't cheap at 17 times this year's sales. Activision Blizzard trades at 22 times forward earnings and less than nine times this year's sales.
I admire Roblox's disruptive potential, but its valuation is still too high, its platform's longevity is questionable, and its losses are too steep to ignore. Meanwhile, Activision's business is better diversified and firmly profitable, and its stock remains reasonably valued relative to its growth. Therefore, I believe Activision will continue to outperform Roblox until it finally proves its business model is sustainable.
