Roblox the Metaverse

Roblox -- the immersive, user generated, gaming platform -- released its S-1 on November 19th and the numbers are very impressive.

The Roblox Model

Roblox has a user-generated-content model. It allows anyone to create an experience of their own through the tools that it provides. It then takes a cut of the revenue generated by those in game experiences. However, this user-generated-revenue model is not unique to Roblox. We've seen successful examples of this before by companies such as Shopify, Wix, Facebook, YouTube, and a few more. The beauty of platforms like these, are that the customers themselves get to build businesses of their own. As an example, over the last twelve months roughly 250 developers on Roblox earned more than $100,000 worth of Robux -- the Roblox digital currency. 

This model has created a self reinforcing network effect for Roblox. As users build better quality content, the more that users are attracted to the platform. The more users that are on the platform, the more lucrative game development becomes for creators and Roblox alike. Each additional person that joins Roblox is increasing the value of the platform as a whole. The majority of Roblox's costs are paid upfront, and it doesn't require Roblox to spend additional money to attract any of the users. This means Roblox pays high upfront costs but low variable costs. This is called operating leverage and should lead to higher profit margins at scale. 

Roblox is yet to hit the public markets, but it's hard not to like the financials from its S-1. In the last nine months Roblox saw bookings grow by 171% to $1.2 billion. Bookings is simply a sale that gets recognized over the lifetime of a user, and in this case a user's lifetime is estimated at 23 months. For most companies in the gaming space this metric can be as relevant as revenue. As for profitability, this little accounting nuance results in a GAAP net loss. While on the surface Roblox is losing money, its actually deceptively profitable. Of the $1.2 billion in bookings Roblox recognized over the last nine months, the platform generated $345 million in operating cash flow and $293 million in free cash flow. 

The "Metaverse"

The book Ready Player One helped popularize the term "Metaverse" after author Ernest Cline introduced a 3D virtual world called "The Oasis," that users could experience together. In this novel, the creator of the Oasis amassed a huge fortune that he passed down through an extremely long and comprehensive treasure hunt.

When reading through the Roblox S-1, it's easy to compare Roblox to the Oasis, as it too is slowly adopting some qualities of the metaverse. But it isn't just investors making these comparisons, Ernest Cline himself stated, "Roblox is the closest thing to the Oasis in real life." On November 23rd, Roblox announced its new treasure hunt event inspired by the release of Ernest Cline's sequel Ready Player Two. The event included seven different experiences that users could explore and search for treasure. The hunt was riddled with clues and the winners could earn various in-game prizes for their characters. Within the first day Roblox racked up more than one million visits to the event. It also included a question and answer session between Roblox CEO, David Baszucki and author Ernest Cline.

While publicity events like these may seem trivial to the long-term potential of the business, they draw users to the platform which helps feed into that self-reinforcing network effect I mentioned earlier. For example, two years ago Roblox hosted a similar event to accompany the film Ready Player One, and it resulted in more than 13 million participants. Pretty impressive considering that at the end of that year Roblox only had 13.7 million daily active users (DAU's). Today Roblox stands at more than 36 million DAU's.

As long as Roblox continues attracting users and the users continue spending tons of time on the platform, the network effects should allow Roblox to financially benefit. Only in this case, unlike Ready Player One, it isn't just the creators that are getting rich, but hopefully shareholders as well.