When Epic Games announced major layoffs back in March, it become clear that Fortnite – once regarded as holding a near-unassailable market position – was facing a serious slump, if not a lasting decline. One common response was to claim that the dream of the ever-evolving metaverse-like “forever game” had not died; it now rode on the shoulders of Roblox, whose meteoric growth with younger demographics likely explained much of Fortnite’s downturn.
There was certainly some truth to that. Roblox, with its accessible creation tools and resulting vast ecosystem of games and creators, looks on the surface like a candidate for being a game that stays relevant forever. The markets certainly thought so. Roblox stock had a massive run-up from mid-2024, reaching a valuation in the $100 billion range around a year ago – making it one of, if not the, most valuable gaming businesses in the world.
That huge valuation came about because Roblox was a growth story – not a mature company that was valued on its actual revenues
That valuation came about because Roblox was a growth story – not a mature company that was valued on its actual revenues, but a growth company being valued on projections (or fantasies, if we’re being less kind) of what it might be in future. That’s not uncommon for tech stocks, but generally doesn’t happen to gaming companies, since their addressable markets and business strategies are reasonably well-defined.
Efforts to shove gaming stocks over into the growth column do happen occasionally, since some gaming execs are profoundly jealous of the valuations of companies across the aisle in tech; this most recently played a hand in the mania for live service games. Such efforts crash up against the hard reality that a large established audience may be very lucrative to a mature business, but cannot be squeezed ever harder for the constant quarterly revenue rises required for a growth business’ inflated valuation.
For a while it seemed like Roblox had managed to square that circle at last. By shipping a suite of simple yet powerful creator tools and letting players become an engine of ongoing content generation, investors fancied that Roblox was a platform, not a game company. A platform could grow forever as creators (increasingly professional in nature rather than being grass-roots players) turned out more and more content, drawing in ever-wider audiences without Roblox itself having to take expensive risks on game development. It would simply sit above it all, managing the platform and taking a cut of all the cash flowing through this ecosystem.
Roblox is still a very big company by industry standards, but investors seem far less assured that it deserves its status as a growth stock
Today, in the wake of its most recent financial results last week, Roblox’ valuation is down 73% in a single year. The results themselves saw the company shedding about $9 billion in valuation in a single day – but this is only the most recent downturn after a year of sharp declines. Roblox is still a very big company by industry standards, but investors seem far less assured that it deserves its status as a growth stock.
They would do well to be cautious on that front. In the short term, at least, growth has definitely hit some major speedbumps; daily active player numbers dropped in this most recent quarter, and projections for revenues in the coming months suggest another significant slide.
Roblox blames some of this on the failure of major new viral titles to emerge on the platform lately, which sounds like a factor out of its control. One of the downside risks of being a platform operator taking a cut from a creative ecosystem is that you’re reliant on third-party creators coming up with hit games, after all.
Leaving aside that “our customers, who are also our content creators, didn’t make good enough games this year” does sound somewhat petulant, this explanation also elides a major reason why new viral games may not have emerged. Roblox itself appears to have been actively making decisions that push players away from quick-hit viral titles with very rapid monetisation and towards what it considers to be games that are more sustainable, if less minute-to-minute profitable.
Trying to ensure that you’ve got a long-term customer base even at the expense of short-term revenues is behaviour for a mature company with a conservative valuation, not for a growth company trading at a huge multiple. It’s unsurprising that the stock market has dramatically reconsidered Roblox’ valuation as a result. Shareholders may expect Roblox leadership to take the hint and return to policies that justify a growth valuation. They will almost certainly be disappointed.
To understand why, look no further than this week’s report that Roblox is now likely to be designated as a “very large online platform” by the European Union. That classification, triggered by its user numbers, comes with some fairly significant requirements regarding illegal content, protection of minors, and platform transparency, including an obligation to grant data access to vetted third-party researchers.
It quite clearly felt that a negative reputation with some subset of parents was a price worth paying for pursuing aggressive growth at all costs
The EU’s VLOP designation would merely be the most obvious and high-profile example of the regulatory and reputational difficulties Roblox faces. The company largely built its platform through appealing to children and young teens, and has often been accused both of massive failings in its safeguarding of children, and of extremely aggressive “dark pattern” style monetisation strategies aimed at them. Until recently, it has quite clearly felt that such problems, even where they created a hugely negative reputation with some subset of parents, was a price worth paying for pursuing aggressive growth at all costs.
Now, however, governments around the world – not just in the EU – are increasingly motivated to regulate and litigate around child safety online, including commercial targeting of minors, and Roblox finds itself scrambling to turn its business into something that won’t be wiped out by such regulation and oversight.
For a company that has been very much in the “move fast and break things” mould – even when, recklessly as all hell, the things getting broken may have been child safeguarding protections – every change it is now making in pursuit of that shift translates as friction on its growth. It implemented age checks on access to social functions on the platform; friction. It changed recommendation systems to push players towards games with better long-term retention instead of higher revenue-per-hour; friction. It started trying to shift some focus towards its minority (20-odd per cent) of adult players; to a platform honed around monetisation strategies for minors, this, too, is friction.
However much that friction may chafe, Roblox will have to grit its teeth and get through this transition. The increasingly significant focus on child safety online hasn’t always resulted in the most technically (or even ethically) sound legislation, but companies need to navigate it nonetheless. While much of the focus has been on Meta (another company that stands as proof that growth at all costs simply cannot be made compatible with rigorous child safety standards), any company with a significant userbase of minors will be in the crosshairs.
Those changes likely cannot be rolled back without risking EU fines that can add up to a significant chunk of global revenue
All the changes Roblox has made in the past year, even though they have cost it almost three quarters of its market cap, probably still aren’t enough to satisfy what would be required under the EU’s new designation – but that designation does mean that those changes likely cannot be rolled back without risking EU fines that can add up to a significant chunk of a non-compliant company’s global revenue. Roblox saw this coming, in the EU and in plenty of other jurisdictions; it’s not that it has suddenly come to value a sustainable, mature business over a high-growth business, but rather that it must change before change is forced upon it.
In fact, the EU’s VLOP designation, if applied, may actually do the company’s executives a favour by giving them a clear external factor that they can point out to investors baying for a return to maximising shareholder value. While other jurisdictions may need to pass custom legislation to bring Roblox to heel, the EU has a powerful generic instrument that automatically kicks in at a certain scale. It’s an immovable object on the legal landscape that Roblox can point to as shorthand for the more complex web of regulatory and reputational challenges it’s facing in markets around the world.
That may mollify investors in the short term; in the longer term, Roblox is simply likely to end up valued as a games company, rather than a tech company. The bigger question, perhaps, is just how much of a sustainable games business actually exists at Roblox if it’s stripped of so many of the questionable business practices that led to its gigantic growth in the first place.
