Roblox: The Meta of Gen Alpha
Q4 2023 ER Update
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Edited by Brian Birnbaum and an update of my Roblox deep dive and Q2 2023 ER update.
1.0 An Ode to Process Power
Roblox has more daily active users than the United Kingdom’s total number of inhabitants because of a maniacal user-centricity sustained over a vast stretch of time.
In this interview Roblox CEO and co-founder David Baszucki explains how in the early days of the platform the co-founders would hang out with the first 200 users. He says this as if it were remotely normal, which, of course, it isn’t.
Roblox was created 17 years ago, and the image of people logging in to interact with each other back then via blunt-looking avatars is absurd. What’s particularly strange in the case of Roblox is that these initial gatherings snowballed into what is today a user base of more than 71M DAUs (daily active users).
After millions of years of evolution, some would call the phenomenon that is Roblox a cosmic joke–that a meaningful percentage of all human beings (0.8%) would come to participate in such a feckless endeavor. Yet there is clearly something fundamentally important about a movement that scales in this manner.
My core observation is that Roblox’s initial mission could have been constituted of anything within the realm of what they created, and still it would have succeeded. Via tremendous process power, Roblox has turned a trivial hobby of a few hundred into a culture with more adherents than the total number of inhabitants of the United Kingdom (66.97M).
When Baszukci and company started out, there was no way they could have foreseen this, but they have found their way by listening to users and iterating quickly for 17 years. The intangible nature of Roblox’s success is best illustrated by Wolfram’s Rule 30, introduced by Stephen Wolfram in 1983: it specifies the next color in a cell, depending on its color and its immediate neighbors.
The first few iterations form simple patterns, but after hundreds of iterations the resulting formations are exquisitely complex and unpredictable to a human mind. Similarly, Roblox, starting out with an absurd MVP (minimum viable product), has emerged as a gigantic and rich culture by following a few rules every day for a long time.
What’s fairly interesting about this business is that, to disrupt it, someone would have to go through the same iterative steps Roblox has taken over the past 17 years to create a similar culture. Either that, or Roblox’s culture becomes irrelevant by itself, which would seem unlikely given a continuation of the aforementioned process power.
The world indirectly attempted to wrap its head around Roblox’s process power with the rise of the term “Metaverse” in 2021, but with the ensuing disillusionment about virtual reality the stock is still down over 70% from all time highs in Q4 2021. The decline has also been motivated by Roblox’s latest investment cycle, which we saw start in Q1 2022 and which has fleetingly dampened the company’s net income and free cash flow levels.
However, Roblox is now emerging from its CapEx bonanza with, fundamentally, a much stronger platform and substantially greater numbers of daily active users, total hours engaged, bookings, and free cash flow. Although the 2021 metrics seemed hard to match in hindsight, the company’s process power has once again shined through.
Over the past few years the market seems to have projected the “Metaverse is dead” narrative onto Roblox’s income and cash flow statements, misinterpreting the temporarily lagging financials as an actual decline in the platform’s relevance. Certainly, YoY growth has not been as rapid as in 2021, but the long term trend remains more than appealing.
To be fair, average bookings per DAU have been trending down since Q4 2020, which if analyzed from the tip of your nose would suggest that the platform was indeed becoming less relevant. But this is why I always insist on the importance of qualitatives–it makes sense for bookings to decrease as people are free to leave their house again.
In turn, notice how average bookings per DAU is seasonally higher in Q4. Also notice how Q4 2023 bookings matched Q4 2021 for the first time since the decline started in late 2021. In the Q4 2023 conference call management explained that they are not optimizing for bookings, but it’s encouraging to see the trend begin to revert. They said that they are concentrating their efforts on growing the network and increasing engagement.
2.0 Ageing Up the User Base
Roblox’s main problem–until now, perhaps–was that most of its users are kids. We can’t tell whether they’re going to continue using the platform as they grow up. The uncertainty on this front is fading.
As you can see on the right hand side of the graph below, users over the age of 13 now account for more than half of all total users. I am therefore increasingly confident about Roblox’s ability to age up its user base. The underlying mechanism has much to do with Wolfram’s Rule of 30–it’s simply an extension of Roblox’s innate organizational capabilities.
During the Q4 call, an analyst asked Baszucki what factors he believes are driving the growth of this cohort. His answer has process power written all over it:
I want to highlight we have been doing this for two, three or four years already.
And several years back, the vast majority of people on our platform were under 13, so seeing the growth over 13 is a really good sign.
We attribute it to such a wide range of things, quality of the platform, search and discovery, organic growth of new older players, existing players retaining and aging up.
He can’t quite point to anything in particular because management barely takes any specific measures that are top-down: they simply set the overarching mandate and foster the organization’s process power over time. When a new goal is introduced to the company’s list of core goals, the process power makes it more likely than not that the goal will eventually be achieved.
Per management’s comments, the behavior of higher age cohorts is starting to emulate those of other well known platforms. For instance, Voice DAUs (people that use Roblox to talk via voice, as they would on Whatsapp, for instance) continue to grow rapidly, up 161% YoY.
In Q3 2023 Voice DAUs were up 240% YoY. Unfortunately, management did not disclose the absolute number of Voice DAUs, but we do know they had 2M in Q2 2023.
We do see a play habits generally of older players that might mirror what we see in existing gaming and communication markets. We can see certain cohorts that might lean in for longer engagement on a PC-type experience. We can see other cohorts that lean in socially on mobile.
-Roblox CEO, David Baszucki, during the Q4 2023 earnings call.
In my Roblox deep dive I explain the importance of search for Roblox as it ages up its user base. Search will enable multiple age cohorts to co-exist on the platform. For instance, Roblox doesn’t want to show adult games to children, since that would be inappropriate and would ultimately harm the engagement of younger cohorts.
Similarly, if you show children’s games to adults all the time, the adults won’t be too interested in sticking around in the platform. Search is thus the cornerstone of Roblox ageing up.
In the Q4 2023 call management said that many countries, including Japan, Germany, Spain, Italy and generally most of Western Europe, are growing “dramatically”. When asked about the drivers, here is what Baszucki replied:
And highlighting, when we talk about product quality in Japan, that's platform-wide product quality, not Japan-only product quality. And that goes all the way down to raw product performance on low-end devices, for example, which can help accelerate countries like India. Search can help accelerate all countries. So really, we target the platform as a whole generally.
It looks like management remains focused on achieving growth viaorganic means, and search is a core component of that strategy. Not that I think they would miss the importance of getting it right to balance the multiple age cohorts, but it is invigorating to see that they’re on the ball.
3.0 Operating Leverage Drivers: Advertising and AI.
Roblox can increase its revenue at marginal cost by running ads in 3D immersive environments and enabling creators to do more with less via AI. Progress on these two fronts is modest, at least on the surface.
In Q4 2023 Roblox booked ads for the first time, with 69 brands now advertising on the platform. During the call, management said the revenue is not yet meaningful enough to disclose, but I anticipate that this part of the business will grow rapidly over the coming years and be highly profitable.
In my deep dive I outline how Roblox launched two generative AI features in Q1 2023, which shipped in Q2 2023, but I see no mention regarding their progress in the subsequent calls. Instead, in the Q4 2023 call management put plenty of emphasis on AI driving real-time chat translation and voice processing for security and civility.
Roblox hashistorically been very focused on safety on the platform, which is one of the reasons why they have been able to compound their still relatively young user base for nearly two decades now.
4.0 Conclusion
I like Roblox more than I did in Q1 2023, but I like Spotify better.
I get the feeling that as Roblox continues to emerge from its recent CapEx cycle, the market will reward the company for higher levels of free cash flow per share. With the platform reaching all time highs across several metrics, I think the stock is likely to see meaningful multiple expansion going forward.
Additionally, I believe the 2021-2024 period is a great additional validation of Roblox’s process power. My appreciation of the quality of the company mitigates my previous concerns, such as the perilous nature of the young user base and whether they would continue using the platform as they get older or not.
I believe that Roblox’s process power is sufficient for it to age up the user base and continue being relevant going forward. Having said that, Spotify’s more attractive valuation makes it a better investment at present.
Incidentally, the Spotify thesis is very similar to that of Roblox. Spotify has world-class process power. Now that they’ve addedefficiency/profitability to their list of core goals, it’s now only a matter of time before they post fantastic profits.
Until next time!
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