Roblox (RBLX 1.22%) has bet significant sums on becoming a leader in a futuristic concept called the metaverse. While the idea of virtual worlds that humanity can escape to sounds enticing, investors should be careful about investing in fantasy lands at this stage.
Here are three reasons Roblox's dream of a metaverse could face a hard reality.
1. Ultimately, consumers may fail to adopt the metaverse
The biggest problem of the metaverse is that there's little consensus about what the term means and whether people will want to use it. For example, nearly 70% of Reader's Digest readers polled in its Future of Tech survey said they aren't familiar with the metaverse, and another 27% said they are only somewhat familiar.
The CEO of Apple, Tim Cook, gave an interview in late September with Dutch media outlet RTL Nieuws in which he said: "I always think it's important that people understand what something is. And I'm really not sure the average person can tell you what the metaverse is."
And Cook is not the only company executive saying such things. Snap's CEO Evan Spiegel and Amazon's head of devices David Limp echoed similar thoughts about the metaverse being a theoretical and vague concept.
Philosophically, Apple, Snap, and Amazon favor technology that improves people's ability to interact with the physical world. This is a prime reason these critics of the metaverse have more interest in augmented reality (AR) -- a technology that overlays computer-generated images on what a user sees, enhancing but not replacing the user's reality.
In contrast, virtual reality (VR) replaces the real world with a 100% simulated environment. As a result, VR appeals more to metaverse advocates like Meta Platforms (META -1.16%) and Roblox; these companies can submerge users in multiple fantasy environments.
Metaverse promoters say these fantasy worlds could become a multitrillion-dollar industry, worth the investment of possibly billions of dollars to build. However, the metaverse is not guaranteed success -- consumers could fail to adopt it. Whether it becomes a profitable venture or a fad in the long term depends on how many people prefer a fantasy world for extended periods, versus interacting with others in the natural world.
2. User safety and security are questionable
In 2018, a seven-year-old girl's Roblox avatar was sexually assaulted in a virtual playground by two male avatars. In addition, the YouTube channel "People Make Games" has alleged within the last year that Roblox is unsafe for kids.
The concern extends beyond Roblox. In 2021, a metaverse researcher, Nina Jane Patel, wrote about being sexually harassed by three or four male avatars within 60 seconds of joining Meta's VR Horizon Venues.
There are other types of security issues people should worry about in the metaverse. For example, Vice has reported Roblox being rife with hackers targeting its metaverse currency, Robux, from kids.
Continued negative publicity over failure to protect users could easily hamper growth initiatives in the unregulated Wild West of the metaverse.
3. The competition will be intense
Although many investors perceive Roblox as a metaverse market leader, the opportunity is still nascent, and the company has yet to achieve any real competitive advantage to stave off competitors.
Many companies are aware of the metaverse's potential and are motivated to catch up and surpass Roblox's capabilities over time. Perhaps its most significant competitor is Meta Platforms, a company making one of the biggest bets on the future of the metaverse. In 2021 Meta's metaverse subsidiary, Reality Labs, lost over $10 billion -- more than five times the total revenue Roblox generated that year.
Moreover, Meta is not the only company with far more resources than Roblox. Another potential significant competitor is Nvidia (NVDA -0.02%), which has built an open-source platform named the Omniverse.
Today, any individual or organization using Nvidia Studio on Nvidia RTX graphics processing units (GPUs) can gain free access to tools in the Omniverse that can create virtual worlds. These tools enable creators to build metaverses free from the platform rules and fees of companies like Roblox and Meta. The possibility that open-source virtual worlds proliferate should strike fear in the heart of Roblox.
But Roblox's potential is massive
One of the reasons you might invest in Roblox is that it's barely touched the opportunity to monetize its 52.2 million daily active users.
For instance, Roblox plans to test advertising in its fantasy worlds on virtual billboards, signs, and portals by the end of this year, an idea that could roll out in a broader campaign in 2023. Should its metaverse concept succeed, advertising could be a gold mine.
If you are willing to speculate in high-risk opportunities, then the metaverse might be for you. However, risk-averse investors should probably remain in reality and avoid Roblox.
