How we think about Roblox

Roblox was brought to our attention by the small humans in our life - nieces and nephews and children of friends (one of whom said a Roblox gift card is her emergency present if her children are going to a party and she hasn’t got anything). As a wry commentator put, never underestimate a child and their parent’s credit card.

Investors in the Elevation Capital Global Shares Fund have made a +73.46% return on Roblox as of writing (we first acquired Roblox shares about seven months ago). We like to investigate companies we invest in thoroughly - this included both playing Roblox, reading about it, watching videos on YouTube of others playing it (there are many, and their popularity is astounding) and ultimately trying to discern where the value of the company lies.

The most important point to understand about Roblox is that it’s not a game. It is a platform. In this sense Roblox hovers somewhere between the open-world building of Minecraft, the broadness of Meta’s platforms and the hardware-centric basis of “old school” platforms like Sony’s Playstation. Roblox has elements of all of those, yet it stands unique against them. Roblox is a platform which allows for the building of experiences and games and worlds. It is incredibly -- almost mind boggingly popular -- it has 43 million daily active users; +7 million developers and users have engaged with it for 11.2 billion hours in the past three months alone. What drives this growth? Developers, and users responding to it. New games and experiences created in-platform have led to “inflection” points which have a direct correlation to the growth of the platform.

The extraordinary thing about Roblox is that all those infection points are generated by developers. Developers themselves are largely made up of Roblox’s vast userbase. There appears to be a “funnel” from user to developer. A user might enter the Roblox system at a young age (13 years old or younger) and “graduate” to a developer. New content is developed in the thousands every day by the +7 million developers developed through Roblox’s “funnel”. The effect is like a flywheel which gets faster and faster -- more users creates in turn more developers which creates in turn more content, which leads to more users (and so on). 

We think of Roblox like an “open garden”. Traditional software development often utilises a “closed garden” framework -- users are kept within the walls of the platform, whether it’s Apple’s or that of Sony’s Playstation. Robolox is radically open -- there is no barrier for a user to become a developer, or be a user-developer hybrid. Roblox has created a “metaverse” over the past decade which is built to support the ever-increasing demand of an “open garden”. In essence, Roblox has more in common with the outside world than it has with other “walled garden” platforms.

The Walled Garden Problem

Walled gardens offer a degree of control over the platform’s environment; for instance, Playstation developers must be vetted by Sony; developers of Apple apps are limited by Apple’s own guidelines and approval process. The limitations continue to pile up for platforms which deal with a 3D environment -- a Playstation game often requires a multi-million dollar budget and a team of developers; a Roblox game or experience could be developed by a 13 year old. The open garden is one possible solution, the success of which has been demonstrated by Roblox.

Incentivising Developers

“Never, ever, think about something else when you should be thinking about the power of incentives.” - Charlie Munger

Roblox’s growth is powered by its developers. Charlie Munger notes the incredibly strong power of incentives is a key (if not the key) driver in human behaviour. Roblox pays developers 70% of the in-game currency (Robux) spent within their experiences, and 30% for items that are sold by developers in the Avatar Marketplace. Developers are highly incentivised to create more experiences. This is a tangible way to monetise popularity directly (TikTok and other platforms monetise popularity, but indirectly, via sponsorships and ads and the like). The power of incentivisation is precisely why we are confident in Roblox’s ability to grow and scale. 

Bookings 

Roblox’s management measures revenue via bookings - the amount of Robux bought in-game. Due to GAAP it is treated as deferred revenue, yet for all intents and purposes it is revenue -- users buy Robux to spend. The gap between revenue and bookings is significant -- third quarter bookings were US$637 million -- reported revenue was US$509 million (a 21% gap). Hence when we think about future earnings, we think about Roblox’s bookings. Their bookings have grown at +120% YoY. The flywheel is mighty efficient. 

The Age Question 

As of Q3 2021, 50% of Roblox users are aged 13 and over -- the first time in Roblox’s history. We think this represents significant in-roads to an older demographic. A common refrain we hear is “isn’t Roblox for kids?” yet it’s clear as the Roblox platform evolves the platform can (and is) appealing to a broader demographic of users. 

The Metaverse

We would be remiss to not discuss the obvious. Meta (formerly Facebook)’s Mark Zuckerberg has invested +US$10 billion in the metaverse -- scant few had heard of the metaverse a decade ago. Roblox has been building its own metaverse platform for over a decade. It has a decade’s head start against the competitors. We often talk about the myth of the first mover -- the first mover is rarely the most successful business (Google was not the first to search, after all --nor was Walmart the first entrant to the discount store). Roblox is not the first entrant to the metaverse, either -- SecondLife and MMORPGs come before it and a host more. Yet Roblox has achieved a system which is both more refined, more scaled and more compulsively enjoyable than its predecessors. The “meta” element of the platform has scaled appropriately - . Roblox has a partnership with Sony music which has led to Sony’s roster of artists having launch events live in-Roblox. Gucci opened a “Gucci Garden” on Roblox on May 17th. Netflix has recently incorporated elements of the hit TV show “Squid Game” into Roblox. The metaverse can be whatever you want it to be -- Roblox has a platform which already has +7 million developers. Roblox is a flywheel getting ever faster

Every company has a flywheel. At its core, a flywheel should explain how the business works. A flywheel starts slow, but starts to whirr and get faster due to Newton’s first law of motion. Roblox’s is a attactive mix of engagement (“stickiness”), spend and content encouraged by the spend. As all theme park owners know, more time spent directly correlates to more spend -- this is a universal truth for all things from hotels to video games to restaurants to social media. Roblox is incredibly sticky -- as we mentioned +11.2 billion hours engaged in Q3 2021 alone. We see Roblox’s momentum as ever-increasing as its very compelling flywheel continues to whirr.