Roblox shares added to ARK Next Generation fund, but why?

Roblox Corp (NYSE: RBLX) completed its initial public offering (IPO) and listed on the New York Stock Exchange on Wednesday.

The game platform boasts nearly 200 million monthly active users. For somewhat of a comparison, Call of Duty, which is owned by Activision Blizzard Inc (NASDAQ: ATVI) recorded 100 million monthly active users in the last months of 2020.

Roblox matches the description

Since this exchange-traded fund (ETF) is an actively managed fund, ARK Invest posts its position changes daily. As a result, we now know that Cathie Wood’s ARK Next Generation Internet ETF (NYSE: ARKW) nabbed 519,086 Roblox shares on the IPO day. But you might be asking why?

It might be hard to see how a digital world could be worth investing in. Furthermore, how Roblox could justify its now $40 billion market capitalisation – that’s right, just under half the size of Westpac Banking Corp (ASX: WBC).

Well for starters, there’s a lot of people playing the game. As this audience purchases in-game items, Roblox gains revenue – and lots of it! Roblox is expecting to hit US$1.5 billion in revenue for the year by the end of 2021.

Roblox also fits into one of ARK’s ‘Big Ideas 2021’ virtual worlds. By ARK’s definition, virtual worlds consist of video games, augmented reality, and virtual reality. Roblox is a virtual world, where people interact with each other through over 50 million user-created meta-games.

According to ARK, revenue from virtual worlds will compound at an annual rate of 17%, from US$180 billion at present to US$390 billion by 2025.

According to ARK, video games aren’t just for fun, they’re part of virtual worlds and investors should pay attention! Find out why in #BigIdeas2021. https://t.co/CjHbyYxBjK pic.twitter.com/ctM4lUSJTR

— ARK Invest (@ARKInvest) February 5, 2021

Video games becoming the ‘third place’

In ARK’s big ideas presentation, it notes the concept of the ‘third place’. A place that is separate from home and work, that people are creating a life around.

According to ARK’s research, time spent on video games for the average person will increase from 1.1 hours per day to 1.5 hours in the next five years. If this does in fact transpire, it will mean more time and likely more money being spent within these virtual environments. 

This trend was certainly catapulted forward by the COVID-19 pandemic. According to Verizon, video game internet traffic increased by 75% in America during lockdowns. Gaming giants like Roblox benefitted strongly from the circumstances, and growth doesn’t appear to be slowing down. For the first quarter of FY21, Roblox expects revenue to double to US$320 million. 

Based on ARK’s latest filing, Roblox holds a weighting of 0.47% in the next generation ETF. Will Cathie Wood increase its holding of Roblox shares, we will be watching to see. 

Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Activision Blizzard. The Motley Fool Australia has recommended Activision Blizzard. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.