RBLX Stock Is Tempting, but There’s a Much Better Gaming Pick

Numerous new video gaming stocks launched their initial public offerings (IPOs) recently. Roblox (NYSE:RBLX) stock has been turning heads, but Unity Software (NYSE:U) might be the best choice.

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It’s been an exciting year for investors in video gaming stocks. For one, gaming went mainstream. The pandemic forced everyone to stay at home. This, in turn, made gaming a more socially acceptable hobby, creating huge momentum for the entire sector.

Both Unity and Roblox are interesting in that they are different from the usual gaming companies such as Electronic Arts (NASDAQ:EA).

Traditional game-makers publish something, generate a lot of revenue from initial sales and then have to produce a sequel to get more revenue. This has improved a bit with paid downloadable content and subscriptions, but traditional game-making is still a boom-and-bust, hit-driven cycle.

Have a game flop, as CD Projekt (OTCPK:OTGLY) just did with its Cyberpunk 2077, and you can see your stock price get cut in half virtually overnight.

Roblox and Unity have different models. Unity has built the guts — the software engine — that go into a ton of new video gaming content. And then there’s Roblox.

A Closer Look at RBLX Stock

Roblox has avoided the hit game curse by building a whole ecosystem instead of just a game. Roblox has a virtual universe for players and there’s a ton of stuff to do within Roblox.

Using the software engine there, users can create their own games, offering a wide variety of activities and new things to do for players. Also, since folks spend so much time there, it becomes a virtual home. Think of it as the spiritual successor to Second Life, an earlier online universe that attracted a decent audience.

Second Life sported an estimated $500 million annual GDP at one point but never quite managed to go mainstream.

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Bulls hope that RBLX stock will be able to make it where Second Life didn’t. Roblox has more activities, but maybe more important, the digital infrastructure overall has gotten much better in the interim. Being able to play Roblox on mobile, for example, makes it far more immersive as an online world than something that was tied to home computers.

Roblox has capitalized on its momentum. Thanks to the pandemic boosting usage, Roblox grew revenues a stunning 82% in 2020. Roblox earns huge gross margins on its revenues.

Issuing and transacting in its in-game currency is particularly lucrative. The company also benefits from having a targeted demographic base; Roblox is simply huge with kids and teenagers — in fact, the vast majority of its users are under age 18.

Admittedly, that’s a double-edged sword. Roblox hasn’t yet proven it can appeal to adults, but that may change as its current users get older.

Unity’s Advantages

Unity is most known for providing the engine for modern video game development. Its namesake platform can produce games that run seamlessly from mobile to virtual reality (VR) and everything in between.

Previously, Unity was seen as trailing rival Unreal on PC and high-end console games, but that’s starting to change. For example, Valheim, a game built on Unity, has already sold more than six million copies in 2021 on Steam, making it this year’s hottest newest release for PC.

Investors also know that Unity makes a ton of high-margin money from its asset store. That is where game developers can buy plug-and-play assets such as trees, buildings, and characters to import into their own games and apps. Unity gets a cut of every sale.

Less well-known, Unity has built a huge advertising platform. Particularly for mobile games (where Unity currently has 71% market share), it allows many game companies to put ads in their games as a way of compensating Unity for using its software.

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Unity then serves ads and splits the revenue between it and the game developer. With the boom in mobile gaming, this has been a windfall for Unity. The company is also expanding into non-gaming applications such as e-commerce, 3-D architecture, and movie production.

The Bigger Metaverse

RBLX stock bulls point to the metaverse as a key angle of their case. Unity bulls do as well. The metaverse refers to a collective shared reality or society.

Roblox has created an obvious metaverse. Roblox is its ecosystem and then players create their own games, levels, art and more within the Roblox community. The more that is created within Roblox, the more sticky the platform is. That’s opposed to normal games, which people play until they beat them and then move onto something else.

However, while Roblox has a solid metaverse, it still risks following the likes of Second Life or Minecraft. That is to say, it develops a niche of passionate fans but never really gains mainstream adoption.

Unity, by contrast, appears set to control a much bigger metaverse. Unity’s role in AR and VR is so huge that Facebook (NASDAQ:FB) reportedly tried to acquire the company.

In a 2015 email that has since been published in a book, Zuckerberg stated that he wanted to acquire Unity. This would allow Facebook to accelerate the development of virtual reality and keep rivals like Apple (NASDAQ:AAPL) out. For example, Zuckerberg wrote:

“Over time someone will need to tightly integrate all of the software and hardware components of [VR/AR] and Unity is at the right level of the stack to do this for most developers. If we own Unity, we can ensure this always happens well, happens quickly and happens with our systems […] If we don’t own Unity, then at best we can incentivize [Unity] and […] everything will just move more slowly. At worst, someone may acquire [Unity] and block this from happening at all or with us.”

Since then, Facebook has continued to lead the VR/AR space. Meanwhile, Unity continues to control more than 60% of the software market for VR/AR. Fortunately for current U stock owners, Zuckerberg was never able to bring that deal to fruition.

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RBLX Stock Vs. Unity Stock Verdict

You can think of Roblox as the modern-day Legos. It’s a great product and has huge appeal in its demographic, but it’s not a mass-market product and there’s little sign that it will ever break out of its fairly narrow category. There’s a good business there, but not one quite worth its present $40 billion market capitalization, at least not yet.

By contrast, Unity is playing in a way bigger metaverse. In owning Unity, you’re not exposed to just one Minecraft or Second Life sequel — rather you get access to mobile gaming, PC games, VR/AR and even industrial applications such as online retail and architecture/design.

Unity has the potential the be a truly massive company in five or ten years, while Roblox is unlikely to enjoy exponential upside. That’s not to say RBLX stock can’t make you some money, but for growth investors, the choice is clear.

On the date of publication, Ian Bezek held a long position in FB and U stock.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

View more information: https://investorplace.com/2021/04/rblx-stock-tempting-better-gaming-pick/

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