Roblox (RBLX): Business Overview and Future (What you need to know!)

all right hello everyone and welcome to pixels and profits the Roblox episode today we'll Deep dive into roblox's business and discuss the current and future outlook for the company as usual you have the pixel Brothers myself Joseph Kim Matthew Countryman and Brian pegan off how are you guys doing not bad how are you doing doing well I got I got my first ski day in of the Season yesterday I'm in Denver so you know that's a very Denver thing and it's it's always fun when you go skiing in the morning and it's 70° when you get home and I was debating going and trying to play nine holes in the afternoon because it was like you know one of those perfect perfect weather days for Mountain Sports and Outdoors I'm here in Bangalore India and just waiting to get back to the US hopefully before Christmas we'll see all right so roadblocks should we just Dive Right In Matthew want to kick us off and take us through the business today's episode is sponsored by data. to access estimates ranking

downloads Revenue usage or engagement for millions of apps on the App Store and Google Play sign up for data. yeah absolutely I I'll kind of give an overview of Roblox and I know Brian wants to go into some of the numbers as he loves to talk Fundy so basically for those that don't know Roblox started about 20 years ago as a as a ugc gaming company user generated content that's that's really what's fueled its growth it's now evolved into a platform with over 70 million daily active users so that's that's an enormous number number they stopped reporting Maus but it's probably North well north of 400 million possibly getting close to 500 million at this point it depends on kind of how you want to think about Dow amount attach rates versus historically they get over 60 billion hours of engagement on the platform per year which is you know just kind of a really interesting thing to think about to put that in perspective every Dow spends about two and a half hours per day on the platform that that's very impressive engagement and bookings are approaching three and a. half billion dollars this year versus 2 .9 billion last year so you know they're

seeing the engagement growth they're seeing the user growth and they're seeing the revenue grow with it now we're going to get into some of concerns and cautions about that later on obviously this was a company that was a key beneficiary of of the pandemic in terms of Engagement and bookings they effectively pulled forward several years of growth in that period but what's interesting is that it has continued to grow uh on top of those levels as opposed to many expectations that they would mean revert and and kind of stabilize it lower Plateau at first they've continued to grow off of that elevated that accelerated period and that's also been encouraging when you think about the future of the platform and you know I think one of the things we're going to talk about today is is Roblox a gaming platform or is it a social network and that's a that's a big debate in terms of how you think about its future prospects they have struggled to grow profitably and this is not unique for Roblox this is a thing that's very common across you know these early stage set companies I mean 20 years old is not necessarily early stage but as a

as a as a grown-up business Roblox is still very young they haven't really operated as a as a real company more so than just a a platform for for for many years and so it's they're still growing up on a profitability basis um and if you look at kind of their their eida and their free cash flow it's all attributable to stock-based compensation addback so lots of questions about can they grow profitably and generate real cash flow they have guided to medium-term bookings growth of north of 20% ker through 2027 which is you know if they live up to that that's going to meet you know that's roughly in line where our expectations are and that would be really impressive I think and more importantly they really need to get more profitable so they're guiding to eat margin growth of you know up to 300 basis points per year we'll see if they can do that Brian well Matthew one one thing I wanted to ask you about one thing I did notice when I was going through the annual report is that it does seem like their analytics is actually not audited and that they they actually admit that there's a lot of

fraud on the platform in terms of potentially overstating Dow and overstating engagement do you worry about that do either of you guys worry about that at all or is that something that you guys are not concerned about I don't see it as a major concern because if you look at individual experiences if you literally just go in and track the number of visits that is on the website of any experience for Roblox you can see the numbers going up if it's not 60 billion hours and it's 50 9 but it's still the growth rates are the same I don't think that matters too much if it was 30 billion instead of 60 billion that would matter but that would be a significantly large amount of fraud that I don't think people think think exists you think about what Matt said about the the rationale between being a social network in a game both of those investors do tend to look at Dow amount metrics as a source of Truth and something that they they underpin valuation to but it'd be more it'd be more appropriate for a social network

you never want to hear that a number is false but I guess it it depends on which degree right if it's 2% or 10% or 50% you know 50% would be a problem and probably not so much somewhere in the middle I think all these a lot of companies struggle with good good retention and and population metrics but you don't want to see something that's way out of line okay all right should we take financials yeah so roblock did about $3.4 billion of bookings for 2023 and they're expected and comfortable with a 44 billion consensus booking figure for 2024 uh likewise for 24 iida comfortable with a hour of about $500 million uh with a $25 billion market cap that equates to roughly 6.2 times forward 2024 bookings and about 50 times iida uh depending on how you classify stock based compensation so 6.2 times forward Revenue not super demanding especially in the context of gaming and especially

software but you know the evidon number is certainly triggering for some and that just goes with the rest of the market these days and in this kind of grappling period with profitability and and revenue we are at an interesting ju position in the market where you know maybe that's turning around a little bit again with the potential for rates to come down next year and things and maybe we stop moving away from you know Revenue at at all costs but still it's it's that's probably the the biggest underpin for valuation being a little bit uh stuffy up here so other thing to note is that roblock was a covid IPO baby the stock is down about 40% from IPO and about 70% from all-time highs Let's Go pass over to JK for a little business overview yeah or maybe I could ask a a little bit more about the financials so Matthew you had mentioned that roblock is not profitable when you look at the financials what what do you think has to happen what's it going to take for them to get there and then C certainly they've kind kind of message

that capex should come way down things like that but I mean it seems like with this level of of loss that they they have there a lot needs to happen I mean are they just G to have to just find new sources of revenue or how do you think that they they're able to turn their business around yeah so I mean if you think about Roblox they have a few major cost buckets and I think it's worth thinking about these different cost buckets and how it flows through all of the numbers I'm going to talk about are on a non-gap basis this is adjusted for stock based compensation which I want to talk about when I'm done with all of this or we can talk about it later because it is a problem for this company and it's also adjusted for weird accounting stuff in terms of deferred revenue and deferred cost because for anyone that's a finance door there's stupid accounting rules that make you defer certain things to Future periods and doesn't reflect the cash inflows and outflows so this is all all roughly a cash accounting

perspective and it gives a better sense of how dollars actually come in and go out of the company right and so if you look at the gross margins are actually you know fairly good they have been coming down a little bit as the business shifts more to mobile from PC and and and then that's just going to continue as mobile becomes a bigger part of the spending P but their their adjusted gross margin is is north of 75% which is still really good one of their biggest expense buckets is actually payouts to developers and this is actually going to keep going up over time so they call this the developer exchange when you adjust for all those things that I was talking about they pay out somewhere around 25% of all bookings to developers and that that seems low you know when you think about you know mobile games you're going to get what 70% after platform fees but when you think about what Roblox provides they provide an engine they provide the storefront they provide the cloud services in the back end when you think about what you get for that 75% it's not directly comparable to a mobile gaming company so

I'm not going to say that it's worth it but it's not directly comparable and those are trade-offs that have to be made the other big expense buckets they they manage their own infrastructure they've built their own data centers they actually recently built entire redundancy across their systems and that was a big c back sync and so they infrastructure trust and safety expenses which also includes like you know all the people policing the chats and stuff that's a big expense bucket that's almost 25% of bookings also obviously R&D is is almost 20% of bookings and then GNA is like n Nish 8ish percent so and then sales and marketing is pretty small it's not a ton and so those are the big expense buckets they're guiding to operating efficiency so as a percentage of bookings as they grow they don't expect to grow a lot of those expenses as much as booking so the percentage as a percentage of bookings those lines will come down that's what you want to see for maturing businesses particularly in gaming you see that a lot you see these uh economies of scale so w with all of the other expense lines

coming down they they probably and they expect to see their margins go up their profitability go up the guidance is for 100 to 300 basis points of ebit margin improvement over the medium term and if they hit that I think that's really impressive and encouraging in the past there's been not not explicitly stated guidance from the company but there was expectations that they would manage expenses better in the past and that they would see leverage and they haven't and so it's really important that they do deliver on that now the one thing they will invest more in is developer exchange fees again this is the the payouts that they make to developers they expect to see that number go up over time they expect to pay out more to developers over time as there's more profitability in the business they expect to be able to return more to developers so that's the one offset to the operating Leverage is is these developer exchange fees so we we'll see over time again and this is all excluding SBC which I want to talk about later I think that's a big problem for this company it's a big problem for a lot of these you know newer Market companies Unity Roblox a lot of them have egregious levels of stock-based

compensation but overall if they execute on this model to you know of 20% plus bookings growth 100 to 300 basis points of e margin expansion the business is going to be very healthy for several years cool so maybe I could just cover the basically the the overall structure of and the components of the roadblocks business for those in our audience who aren't aware but there's basically three main parts first you've got the Roblox client and so if you have kids you've seen them kind of jump into the client and that's the program that players and kids use to play the different games AKA experiences and then the the second part is Roblox studio so this is a program used by creators and developers to build and publish Roblox experiences and then the third part is Roblox cloud and so one of the great things about Roblox is they provide a lot of the backend the infrastructure all the things that you need to do to be able to deliver against a a game or experience and so with Cloud that's what power all of that and

organizationally the way that Dave bazuki the CEO of Roblox describes the compan is basically as eight companies plus Central functions like finance and other groups so Dave describes more or less the kind of like the HR and people group as the primary group meaning that they're putting a pretty huge emphasis on the employees and people now whether that's just him saying that or that's actually truth well I don't know but so but there is that the people group and then there are seven product engineering groups a couple of examples would be the infrastructure Group which builds Roblox Cloud the economy group that works on economy currency and advertising and things like that now maybe one point of controversy just to kind of mix it up and just keep things real that I can bring up is there does seem to be a little bit of a different perspective from Dave bazooki and internal messaging from like Roblox exe Executives when they kind of push this constant theme of running worldclass engineering teams and

massive operational efficiencies and you'll always hear them talk about operational efficiencies versus some outside folks some of the developers on the Roblox platform that in hush tones will tell me okay don't tell anybody but I think the roadblock infrastructure is actually not that great it's kind of they're actually not that efficient and it's actually kind of all held together with duct tape and rubber bands so anyway I'm just you know I'm I'm just the m messenger but yeah there does seem to be a little bit of a gap there Matthew I think all of the criticism of the infrastructure historically is valid I mean up until recently pretty much every day it would crash at some like the syst the platform would crash at some point and it was just because of they weren't built for 70 million Dow they were built for 20 right and up until 2019 they were on a smooth Glide to grow Dow from 20 something million consistently and then all of a sudden they spiked up to 50 and now they're at 70 and that was part of the effort to build all this redundancy

in the system I still think it's it's better now than it was two years ago but I think you're correct I think that they are playing catchup on a lot of these backend things that you know historically weren't necessarily a concern but having pulled forward so much of that engagement and user growth they've really had to prioritize that it's interesting though how many companies have had a platform for 20 years with the main proportion of growth coming in the last three it's pretty unheard of not I don't know very many software platforms across the entire space like d data analytics or CSM or customer service type stuff that doesn't need a full reboot after 10 so it's a lot to be said for even working 20 years later right and maybe a few words on the Creator economics but when we look at the creators I kind of like some of the things that we're seeing is that the top 10 creators are making on average 27 million a year and and roblock actually pays about 40% of its developer exchange

fees as as Matthew had mentioned to the top 10 experiences so clearly there's like high concentration at the top likely parallel distribution as per you know many other game you know ecosystems that that you see that also crater number 100 is making about a million a year and creater number 1,000 is making about 65,000 a year and Roblox claims to have over 20 million Roblox developers but I think that's a little bit overstated because like they like to say that anyone who plays is a is a Creator I think that number also includes people that make Avatar items like people that make shirts and sell those right and so you know there the the the term Creator developer is is quite broad I think the number to Keon for people paying attention is what you mentioned I think this is an estimate from one of the cells side Banks but even so if it's roughly 40% of of the

developer exchange fees so the payouts go to the top 10 top 10 experiences I mean again that's that's not different than I mean maybe it's a little more Consolidated than like the iOS App Store for games right but like you look at the top 10 like th you know those are the money printers and then it falls off very quick maybe out maybe it's not 10 maybe it's a hundred but you know you see the same economy as a scale in the mobile game Market that you kind of do on Roblox and I think as as the developer ecosystem becomes more professionalized right if you look at the game fam the super socials of the world that are building these these more upscaled higher Fidelity um experiences branded experiences on Roblox that are getting hundreds of millions of interactions you know over their lifespan as opposed to you know these little quickfire games that you know used to kind of dominate the platform those economics are to continue to look more like the mobile market is what is what I think okay so maybe we could talk about how Roblox is able to get out of this hole that they're in and grow their way

to profitability Matthew what you wanna you want to take us through some of the growth opportunities yeah I I mean it's it starts at the at the at the top of the funnel right and that's Dow and at 70 million Dow like you know you definitely there's room to grow but you have to think about what is the incremental arpo the in or the incremental bookings potential of the incremental Dow that you're adding it's very low they're very heavy saturated in you know the markets that matter North America and Western Europe where there's actually spending power right for the in-game items or in experience items whatever whatever you're spending on right and so in terms of you know and this is no different again than than Mobile gaming right we're talking I mean JK you you're in India right now we've talked extensively you know privately and even on podcast about the growth of the Indian mobile market tons of users they don't spend any money right relative to you know the the global pie of mobile gaming right and so I think roblock is kind of in a similar boat where they can continue to

grow the Dow continue to grow engagement but the revenue upside from just inapp purchases the you know the pure spending power of those incremental Dow is very low and so this is where we start talking about additional incremental opportunities subscriptions to monetize those those uh profitable users in in in the tier one markets that's that's one advertising which again I think if we're talking about Roblox as a social platform more than just a gaming platform you're going to look at increment opportunities particularly advertising to monetize especially in those markets where the spending power isn't high and then lastly what's rolling out next year is e-commerce opportunities the ability to sell real world items on the Roblox P platform I think the biggest one and the most near-term one of those three is subscriptions there's already subscriptions today there's the Roblox premium subscription I think it was like I stopped paying for it for a while because I wasn't on Roblox a lot I think it was like seven bucks a month or 10 bucks a month or something whatever it is and you get extra Rob every month you get discounts on Robux purchases but

it's really just kind of like a virtual currency you know discount pass at that point right and that's great like that's great for the platform to have people paying that but wasn't really moving the needle I think what's going to move the needle particularly for these more professional larger development Studios that are building on Roblox is inexperienced subscriptions which you know I think are still coming they've talked about it for several years um but you know the ability to actually subscribe to you know specific Roblox game experience that you like and get incremental items premium items Early Access whatever it is things like that inside of those specific things it's almost like a battle pass for specific game specific experience on Roblox that's going to really help these more Professional Organization scale and become much more profitable and really drive more investment on the platform it's kind of like if you listen of Roblox they talk about these flywheels and I hate the term flywheel because I'm I'm scarred by John Malone and Liberty but but you know it really can become powerful in that sense so you know

before we kind of move on to the other ones which I think are a bit more speculative and and take more debate you know Brian what are your thoughts on subscriptions and other you know those those core opportunities to the platform yeah I think anytime you have a a large user base and you're shifting to a recurring subscription platform that's a huge Tailwind for for the business it's really going to be about whether or not those individual developers at the at the high end can show their players a good amount of value for what they're getting and then you know managing churn on the back of that so it's one thing to be able to come up with a good subscription that lasts for you know four to six months very respectable but how do you keep those people coming back for years and years to an individual experience inside of a larger ecosystem I I I'm pretty favorable to subscriptions JK any thoughts on subscriptions yeah subscriptions are good not not much else to say I bill you every month yeah the entire world is Shifting subscriptions and the other thing that about subscriptions is like

if you can if you can show that value you can continue to raise price I don't know if people have been checking their credit card receipts lately but you know Netflix Apple Spotify everyone's taking price at like this tail I don't want to say tail end of a bull market but you know this is the time for tech companies to induce pricing power and it's by and large work yeah and I I think the thing with subscriptions is that it tends to help over monetize I you know I the one thing I do know is that well okay so there's a rumor word on the street that there are some subscription Services where like for example ABC Mouse where maybe over half of the subscriptions are not active so yeah it does help you to continue to monetize whether you're using it or not yeah good or bad so this ties into the next opportunity which I think is advertising and one thing I forgot to mention about the Roblox premium subscription is how that money some of

that gets paid out to developers through what they call experience based or excuse me engagement based payouts so the the more time that people that pay for that subscription spend in your experience you get paid out more and then roox launched this thing called portals last year which is literally Billboards that you would stick inside of one of your games that you made that would take you to another experience right and so if I was you know a company like Gucci that made a famously you know good really good branded they made their own world on Roblox if they wanted to stick a portal in some 12-year-old's little game they could do that they could pay for that and then you know if you were playing in that little 12-y old's game and you jump through that portal you end up inside the Gucci world but this is kind of at odds right because you're telling people I want to pay you based on how much time people spend in your experience and then I'm going to tell you to send them somewhere else right so it's you and there's not a lot there wasn't a ton of analytics in adtech built into the platform to exactly understand the trade-offs between those two and so I think as Roblox is focused on growing advertising it needs to be bigger and more technical

than just literally Billboards inside of the platform and I think those are coming they've talked about building you know more advanced adtec tools that I think you know I I I think in the in the bowest scenario can can rival you know what what's used in the gaming market today and in Mobile gaming maybe not as sophisticated or you know even the sophisticated tools don't work anymore because because of Apple that's another debate right but if if they can give an experience to traditional developers that is more familiar enabling them to better understand the UA costs and the ROI and the C you know and and and and the lifetime value of of users on the platform you know that could even be a way to entice traditional mobile developers to think about building on Roblox I know jku did a podcast talking about building on ufn with epic well you know what if Roblox becomes an alternative platform as well I I don't think anyone's talking about that I think it's very speculative at best but you know if if these tools are successful and they can continue to you know build up that adtech layer and really make advertising a bigger part of

the business that can get that can get interesting yeah if I if I compare and contrast this to the mobile gaming Market there were I don't want to say hundreds at least dozens of companies that were pushing to include things like Billboards or static pictures inside of games and they didn't really have much of an impact and there wasn't a lot of appetite from Mobile gaming Publishers and or developers to include that sort of stuff inside of their games mostly because of what you just talked about Matt it's really hard to attribute those uh visuals to The Advertiser to reap any sort of reward that the publisher is willing to to SP spend the other Counterpoint there is and and this is especially brutal in in the the portals case is like game developers by and large don't want to detract from their own experience right so like even if portals are underfunded or they're not super fun and engaging like what what do I get from sending someone there like an opportunity for my player to churn like what if those portals become really fun in something someday and then you know

you start losing a lot of users to Gucci world it's maybe not a super easy scenario to see but any touch point that a company uses to point their user somewhere else is an opportunity to lose a customer and that's their most valuable asset so yeah but that being said if you think about Roblox and the community they've been able to Garner over time it's a very attractive one right it's a younger audience that they're they're spending a ton of time in there advertisers have buckets of money to spend they want to use it in new ways because the old ways are largely saturated and and ineffective at this point so you know it's there's going to be some way to thread the needle and have a good experience in there where you know the developers recognize for sending the player The Advertiser reaps some value and there's an exchange of of currency there that makes everybody happy just hasn't really happened yet so any other thoughts on growth Brian yeah the last one I want to touch on is is what they're doing with e-commerce potentially later this year so starting in the end of 2024 you know

historically it's been banned to include links to anything outside of Roblox inside of a roblo experience or on the web page or whatever what they're going to allow developers to start to do is to link to real world websites to sell real world items and I think this is going to be most powerful for these branded experiences so you know my friend Yan who I used to do into the metaverse with at supercial they just launched a successful world with elf the beauty care company right so they make beauty products they're pretty popular with you know younger generation of consumers you know what's interesting though right now is building a branded experience on Roblox is no different than a TV commercial or a billboard it's a branding experience and although these are real businesses this is just a vanity metrics thing right it's all about eyeballs and how many people you get it in front of if e-commerce becomes successful and then these World start to become gateways for Gen Z and younger audiences to do their shopping to start their shopping searches to then take them into

the real world you know of the internet effectively and buy stuff in the real world now you're no now you're moving the goalpost you're no longer talking about vanity metrics eyeballs engagement you're talking about conversions you're talking about spending power and I think this changes the conversation inside of board RS right it's no longer just someone in the marketing department with a small little budget if this is if this works this is a material you know source of business for a lot of these companies and then it it becomes a much bigger opportunity a much bigger Focus for the boardroom and it shifts the conversation around the level of investment into the Roblox platform yeah e-commerce is is interesting you know it's hard for me to think of examples of games that have done this successfully I can think of a handful of games from my experience that have tried it and we pretty positive on it but it it didn't work out for a variety of reasons we we can get into but the tide is turning a bit on core search and shopping for for younger Generations specifically on social

networks Facebook eons ago but more recently Instagram and Tik Tok and Tik Tok has actually replaced Google for a lot of younger Generations in core search right so like if you think about recipes for instance the recipes on Google are broken right you want to find a chicken soup recipe you you click like 40 links and you scroll through 100 pages of text to find a a recipe or you can go on Tik Tok and search for chicken soup and you can watch someone make it in 15 seconds and it's super easy and and clear um going back to the prior Point again game developers typically aren't keen on introducing links that take people out of the core experience which is you know worth worth noting but from an investor perspective this Catalyst in particular isn't something most folks will want to lean into and pray pay a premium for until there's some some moniker of success and and that's totally fine if it ends up paying 15 20% more for the stock at that point in time because then you actually have an actual narrative to establish a bull case around around the other kind of lingering question is how is this going

to monetize right so like e-commerce in general isn't a super extraordinarily profitable business even for Amazon and things like that other parts of the business lift up profitability but you know is this just going to be standard click referral fees and such and and a small big paid back and can that really be as big of a driver as sales of digital merchandise where Roblox controls the entire ecosystem and platform that's that's a big nut to correct but if this can start being like that five for of booking story I think it'll get a lot of momentum but it's just a lot of wooded chop it's very unproven inside of a gaming experience but very interesting I absolutely agree I I don't think your cat in the background does just tuck their head away from in my face yeah I I fully agree and I and I've mentioned it a few times it goes back to kind of the debate do you view Roblox as a gaming platform or do you view Roblox as a versioning social network right because if if you view it as a gaming platform all of these things probably fail advertising e-commerce don't work in gaming and I fully agree with that if you look at the

level of Engagement and the way that younger users what's this that 80% 90% of the Dow or under 21 I mean the goal poost shift as as the years go on because they just get older by default right but it's a very young audience and and so if this is the way that you know the future Generations are going to interact on the internet and socialize this is more and more a social network then we start to think about these opportunities that are prevalent across the social networking ecosystem as opport oop excuse me I hit my mic as opportunities for Roblox and so I I think I think that's a big part of the debate is if this is successful and and then the monetization I fully agree we don't know what it looks like but all the conversations I have just about people excited about this as an opportunity particularly brands that want to invest on the platform they want to see this work because it again it moves the goal poost for them and makes it a a much bigger opportunity for them yeah Matthew I I think like the the point on the social network is is at least it it seems like that's exactly how they're viewing themselves right and

I think Dave bazuki has mentioned multiple times that his vision of Roblox is as a 3D social utility communication platform when you look at the capabilities and things that they're rolling out like the Roblox connect Avatar calling feature they've spoken about how in the future they would like to enable kind of like in a very meta Mark Zuckerberg kind of way that the photo realistic virtual meetings and things like that so like that potential for growth in the longer term future future I I think is there and yeah yeah so so certainly I I guess those are some of the potential areas of growth for them maybe one other point of growth that I I thought maybe that I could mention is is basically the opportunity for for supporting Brands so what I have a friend who who has developed a I I think pretty successful roadblocks experience and I was asking him about the size of the team he told me they were over a hundred and I was like why

why why do you have over a 100 developers I thought Roblox games were just like these small teams he's like oh but we need a lot of people to support a lot of the brand Integrations that we do and I was like oh interesting and so and it turns out that they're making about as much money on the brand Integrations as they are from Roblox so certainly I think that there could potentially I'm just theoretically thinking if if Roblox is able to help create a you know more automated or or or platform so that you don't have to have a 100 people because I'm sure a lot of these smaller Roblox guys don't have the capability of of having 100 people but then to be able to connect to Brands and integrate those Brands into your experience that may also be another potential area for Revenue growth for them in my opinion so a couple other it's it's it's indirect for Roblox so Roblox does not make any direct money from Brand launching on the platform whether they build their own experience or they do an integration

into an existing experience they just play matchmaker and they don't take any money from that but as you said they make money from item sales from all the other ways that they make money so you know I remember what was that story Gucci did a limited release of one of their handbags the dionis bag this was back in 2021 I think and it sold for like more in Robux than the real world value of the real world Gucci dianis bag was selling for and these things sell for thousands of dollars like on the secondary Market so you know that that that's how Roblox will make money from these Integrations but you know the brands that are investing there there's no direct monetization from them yet and maybe maybe I just don't understand it well enough but kind of what I'm what I'm thinking is like if there was a way to create a technology or platform so you don't have to have the hundred people but you can help integrate those Brands and and way and I don't know maybe it's a maybe it's not possible and I just don't understand it well enough but certainly I mean I I don't know the specific company you're talking about but like you know I think if what you're describing is kind of like you have this

this you know there's there's tons of millions of creators on the platform and they build virtual worlds in many scales you know one 12 as I mentioned a 12-y old can build whatever and if a brand wants to integrate they just need a way to reach out to that person and if they're under 18 they probably need an adult to like sign the paperwork for them right so like there's companies that just sit in the middle and make and make that matchmaking work and I think if what you're describing is kind of being that middleman that that B2B connector um it's probably just mostly BD people right not even developers at that point if you're building worlds for companies you know depending on the scale it can only you don't need a ton a ton of Roblox developers to build something I'm not going to say minimum viable product but something that's going to be respectable and and kind of you know a good example of the brand and then depends on the scale and how you want to scale it from there you know I I'll find out I'll ask him at a later point in time and report back here there there's a a couple other green shoots worth mentioning in growth vectors the first being International recently

disclosed that Japan is growing in excess of 100% year onye India South America lower arpo but massive user bases so those are are worth keeping an eye on the complexity there is mostly around localization and if youve spent time in the games industry you know that it's a lot different than just kind of changing languages and things like that it's a lot deeper it goes to core design of games it goes to Art stock and cultural differences and things like that and also like PlayStation just launched not too long ago which you know obviously helps the Japan given how how cemented that brand is in in Japan something like 15 million downloads over a few weeks post launch so other other things just keep note of cool yeah I mean and and I know I'm looking at our notes the next thing you want to talk about is AI but AI plays a major role International translation localization because historically that was all manual right that was literally just people translating stuff and localizing stuff but if if we can make

AI successful at localization and translation that's a huge reduction in the cost burden on the developers to do that and it's it's a really good way to expand into into the non-english speaking world for a lot like I remember they forget I think they talked about Indonesia a few quarters ago how like they started localizing into the local Indonesian languages saw a huge uptick and DOW from the country so you know it's it's now the monetization is a different question because these countries don't have the spending power but in terms of the Dow growth it's clear that when they localize and have translation and localization they see upticks and DOW that that is absolutely proven and that's likely to continue as they do more of it yeah I I kind of wrote a list of some of the AI initiatives that I I saw through the various you know notes that I saw but some of the things that I saw was one the material generator where you can automatically produce various materials in your experience code assist which is a way within Roblox studio so that that you can learn and improve coding they also have ai documentation where in

Roblox Studio you can you can basically generate natural language queries like you know how do I monetize my game how do I improve this feature and you automatically will get summaries of existing documentation there's also realtime machine learning based chat translation automated content moderation is you already spoke about Matthew also Avatar expressions for Roblox connect so that you know your avatar would potentially have the same kind of expression as as you do and then coming up it seems like they were working on realtime voice moderation which would be interesting and for anyone who's played shooter games quite useful and then also taking 2D photos turning those into 3D avatars and then something called Helix which is conversational AI on top of Roblox studio so basically creators would be able to talk to Roblox studio and say give me a city scene in the N 1820s whatever and also that kind of

conversational AI that could be integrated into NPCs similar to existing conversational AI NPC companies like enroll or envey the other other one to note that I saw is a virtual proxies so you you know you think you're so busy that you have a virtual proxy that can do automated tasks for you and things while you're away which sounds kind of a dystopian like an Auto battler of sorts but but here we are I think you know the AI story for Roblox I don't think can be ignored this is one of the themes that I'm watching just broadly across TMT for 2024 is is how companies can eloquently integrate chat technology into existing platforms and so for Roblox I'm not sure this is a revenue driver I'm not privy to how they're going to charge for these things for Content generators or whatever else but what it does do is it's a PL a PL purific of uh of of content right and that can be pretty powerful for a

business like this because that's how they you know they make their money they make their money on content and new experiences so if that can be easier to generate with a lower skill cap suddenly your your funnel for creators has exploded you just need the Dow to be supportive of of engaging with and monetizing that content so certainly something to keep an eye on and you know this alongside companies like Unity or adobe the folks that are able to turn this on a dime and monetize it in some way or fashion are going to uh I think rewarded in 2024 in the markets I definitely see it as more of an efficiency tool for Roblox than as a revenue generating tool at least in the you know kind of medium term right I mean trust and safety right historically they literally just had to have armies of PE then they did some with machine learning and whatever but historically it was and it's no different than Facebook right armies of people just reading stuff and moderating it if they find bad stuff right you know the more of that that you can automate the more of the content generation that you can automate you know I think the the the

demo video they showed for the generative AI tools for asset creation was like you're literally just typing put a car in my world no make it like a Corvette and now make it red as opposed to having to know all the code and what's the coding language I think it's luo Lua like I forget what it's called but everyone hates the coding language of Roblox and so know the ability to not have to deal with that and not have to learn a new coding language and do a lot of it just with normal English not unique to Roblox in a sense that's that's happening on a lot of different platforms but is a powerful efficiency tool yeah it's a modified version of Lua but I think Brian to your point and maybe the revenue Driver part is whatever you're calling prolification or whatever what proliferation I just proliferation but but yeah like I I think like to to the point where you have that proliferation where because of AI you're able to take some audience that doesn't no Lua and turn them into creators and to be able to like you know

close the loop on creating more experiences so then you have more experiences also having creators be able to more quickly develop even more experiences that could potentially then have more engagement more revenue and things like that so I I can see that as as potentially very helpful for them and AI just as a I mean the primary one of the primary applications of AI is you know generative content and things like that so if if you can't help I mean and as a ugc platform you think that roadblock should be one of the main you know main beneficiaries of of AI technology but yeah we'll see it's it's not just the prif foration of content and the monetization as as a backdrop but also substantial cost savings right that just given what Matt talked about upfront how much they spend on content moderation and making sure their users are safe this could be a very big tool for them yeah yeah I think this ties in challenges I think it's a a good place to go next because because one of the big ones is this is a business built on

young users and if we know anything about Regulators they're very attune to type of content that young internet users are exposed to right that's a big part of the reason that many people want to ban Tik Tok in the US it's a big reason that you know the EU is cracking down on Facebook and other platforms it's it's the type of content advertising but also just regular post that are exposed to Young users that's a big risk and so I you know they've done a lot of investment and a lot of hard work and in content moderation I think AI plays an increasingly big role in their ability to continue to scale the platform safely and avoid some of that geopolitical risk all right and in terms of other challenges what do you guys think what what what what's gonna potentially kill these guys I don't know about kill you gotta start with you've got to start with a competitor set right you can't talk about Roblox without talking about all these other companies that are trying to build the next iteration of social platforms 3D real time enabled

social platforms so epic what they're doing meta Facebook but what they're doing with Horizon and other initiatives right you have to think about how does Roo stand up grow in a world where these companies are also investing right you saw recently epic launched ufn which is their ugc platform we saw them you know they're coming out the next few days they've got these other non fortnite experience you know non BR fortnite experiences right so the the music one with Eminem they've got the Lego thing right they're trying to expand Beyond being a battle royale fortnite single game company with all of these initiatives if they're successful that's a big risk to to to Roblox for sure and then meta is still in the early stages of whatever they're doing with Horizon and their their metaverse initiatives right if that's successful they've got much deeper Pockets than Roblox does right that's also a huge risk yeah but I mean do you think there are many more competitive platforms besides those two

it seems like those two are it and you've got on the one hand epic potentially competing more from the gaming side and then meta competing more from the vision of a future you know kind of social platform side but I mean besides those two I I don't know I don't think there's anyone else that is really viable unless Microsoft will be there just because they will be they have enough you know of core pieces to be there when they want to you know if they continue to be focused on building a consumer business which even after the trials and tribulations of gaming the last several months and how bad a lot of their releases have been Sach is focused on growing a consumer business right and and so I think that's a big part of potentially what they're going to do you know down the road after building a mobile business which could just be antitrust nonsense but we'll see you know so I think Microsoft could be there 10cent right we can't we have to think globally as well 10cent will be there I dance potentially though they're scaling back their gaming Ambitions what does that mean for you know what they're

doing with VR and the metaverse so I think there's a global competitor set Beyond just those big two that we have to be concerned about and again all of these Pock companies much deeper Pockets than Roblox got it all right so can I I've been waiting for you to talk about stock based comp you you want to hit that Matthew and you know in honor of Charlie Munger in his passing maybe you could give it a little extra spice stock based compensation by it you know in a vacuum is not a bad thing right you need ways to compete and retain and attract talent I understand that the problem with a company like Roblox is it doesn't generate cash flow to offset the delution by buying back stock and they're paying out I'm just looking at my numbers 30% roughly of bookings is stock-based compensation right now you know basically I think what that equates to is a couple percentage points of dilution every year so every year your investment is a percentage of the company is going down by a couple percentage points because of

how much they're giving to the the employees of the company right now there are lots of companies that do lots of SBC but they're profitable and they generate cash flow and they can buy back stock to offset that look at EA for example right this is one that I think has been very well managed from a cash flow perspective for several years you know when when Blake came in 2016 2017 Brian right and kind of really took a fine knife to the model there you know even though they're paying out SBC it's it's not as nearly as much as percentage of Revenue as it is at roblo but they're also generating cash flow they buy back stock every year to more than offset that so the total share count actually comes down Cisco another great example of a company that does this right and so I think I think when you look at the scale that it's happening at and the fact that they don't have the finances to offset that dilution you just have to think about that in your investment thesis that that every year your stake in the company is going down because they giving free stock to insiders yeah we we've covered SBC in a

few other episodes I not really sure what rack them off top of my head but the BuyBacks are certainly a great offset and then the notion that especially for like consumer and B2B software the growth is so robust that over time it becomes just much far less of a concern because your employees don't scale nearly as hard as revenue does but we're not quite there on on Roblox like if you think about Like A good rule of 40 type business uh right now roblock is a rule of 20 right like for forecastable growth of is 20% uh next few years but you know EA is you know zero and it's growing zero so that that's probably the one that will cause the most investor distaste and you know for now Roblox is more of a trading vehicle to be honest it's it's it's not one that you want to just as a retail investor or or whatever try to time and things like that you'll get your your face ripped off but you know over a long time period like Matt mentioned this actually does have a pretty demonstrable impact on numbers and how much of the

company that you own so certainly something to keep in mind and I guess this all ties into the valuation and how we think about it as an investment because we are the profit Bros on this side right Brian and I and I think you you kind of let off in the beginning you talked about the valuation you know sixish times 2024 bookings not agregas compared to like the gaming sector but the fact that IA is single- digit percent IA margins and most so that is stock based compensation addb backs you know there's really no profitability and so that's that's a tough call to swallow you're paying whatever 50 times 20440 but I think the the the range of estimates is really wide so you know we don't really know what it's going to look like depending on how fast they generate these operating efficiencies right and so I think I think earlier this year when the stock was you know sub30 before it went a 50% year to date you could say even with all this solution it's still pretty attractive on a relative value basis plus as you mentioned it's a trading vehicle it's high beta it's a common arc stock right

you know it's this sort of thing that in a bull market mentality it's going to do well earlier this year you looked at it and said you know this could be attractive but after going up 50% year to date you know valuation if we're questioning it it's probably too high to be an entry point right and and you have all these negative factors the dilution Etc and these options you know these growth options that are just call options we don't know what they look like and it's hard to you know model them until we see results from them it's hard to say that it's a screaming buy at this point should should we end with future outlook what do you what do you guys think you know last quarter they they did show investors in the street some proclivity to to move the needle towards profitability and I think they were rewarded for that for a time it's going to be a continued challenge for them to keep that narrative alive while Main maintaining growth uh I I I would assume

that folks are certainly on the sidelines waiting for some more validation of that that that profitability is a focus for them and you know the big mover of the stock will be if some of these growth opportunities that we talked about specifically advertising subscriptions and e-commerce if those can show an inflection and become a material part of bookings or at least show the early signs that can be then I think you know there's some potential for this to be more of like a 30 35 billion company which should be a pretty pretty solid return that's a you know 30 40% rip give or take but you need to see both continued profitability or you know movement towards profitability and some new growth factors to uh assage the concerns that this is just a product that's been fully saturated and Market at matter like Matt said earlier yeah I mean if they execute on the model they're going to be what roughly seven billion of bookings by 2027 and EA margin 15ish perc right so you're talking about eida at that point of over a billion dollars right that's

decent money even if you then add back stock based compensation they're probably generating cash EIT it's still positive at that point like that is a interesting story but I think a lot of that is priced in at this point right and that's kind of the base set of expectations and stocks are a game of expectations right and so what's what's the incremental upside to that that's going to get you beyond that base set of expectations that's why I'm kind of a little bit more cautious now than maybe six months ago yeah so for me I I love the product I hate the business hate their stock based comp hate their just general approach to in my opinion Financial irresponsibility so I I hate them today but I I do think that you know AI is kind of set up to save these guys so I I think in the the longer term I think they get saved by AI personally oh also just lastly round it out by saying there's a non-zero chance that someone looks to acquire them right what is

Microsoft's metaverse strategy they have Minecraft right but you know or or some other large company you know now that the antitrust gates are broken with Microsoft buying Activision anything is really possible it's not inconceivable that someone throws a bag of money at them and says you know be our metaverse company now Dave bazooki and his family control like two-thirds of the voting power plus or minus so they pretty much have all control over decisions like that so it's it I think not only financially needs to be an attractive offer but it needs to he wants to build Roblox in his vision and he wants the independence to do that so it has to be an organization that's going to give him that Independence that structure to do that and that's I think more of a challenge than just the money all right guys well I think that's just about it unless there's any other final comments from you guys nope all right well in that case there we go the pixel Brothers on Roblox and for our audience we will

catch you next time bye [Music] everybody oh