Roblox, the platform for user-generated games, will go public through a direct listing of its shares on March 10. I see its pending success or failure as a stock as a kind of referendum on the metaverse, the universe of virtual worlds that are all interconnected, like in novels such as Snow Crash and Ready Player One. Is that a reason to buy the company’s stock next week?
As much as anyone, Roblox CEO Dave Baszucki is a kind of James Halliday figure, the fictional billionaire who built the Oasis, or the version of the metaverse in Ernest Cline’s sci-fi novel Ready Player One. (OK, maybe he’s more like Ogden Morrow, the cofounder of the Oasis in the novel). Like Halliday, Baszucki is the visionary who dreamed of building the metaverse in the early days of his company 17 years ago.
Baszucki and his cofounder Erik Cassel played around with physics in a virtual world, and they coded a platform where kids and adults could interact in 3D simulated virtual environments. The materials were physically accurate blocks, like a world full of virtual Legos, and users could build whatever they wanted. They wound up building games, and those user-generated games became the foundation for a business behemoth. Sadly, Cassel passed away a while ago, but Baszucki never neglects to mention him when talking about the company’s early days.
Roblox’s games have become so popular that the best have been played billions of times. On average, 32.6 million people come to Roblox every day. More than 1.25 million creators have made money in Roblox. In the year ended December 31, 2020, users spent 30.6 billion hours engaged on the platform, an average of 2.6 hours per daily active user each day.
Into the metaverse
When I interviewed Baszucki at our GamesBeat Summit: Into the Metaverse event (see the video here), we didn’t talk about the stock offering. (He wasn’t allowed to do that, per securities laws.) But he has never struck me as the kind of person who is in it for the money, or a quick buck. He said he didn’t view himself or Roblox as building the metaverse, as he considers Roblox to be a “shepherd” for the users creating the metaverse. He said that Roblox had no business making its own games on its platform or attempt to curate for quality.
Rather, he said the No. 1 thing that the company is investing in is ensuring that it has a safe and respectful community. This “digital civility” push will keep Roblox a safe place, which is key to keeping its core audience of kids and keeping the trust of parents. The company has 2,300 trust and safety volunteers that help keep the peace.
But Baszucki has put a lot of thought into what it takes to build the metaverse. During the pandemic, Roblox saw its usage go through the roof, as many other game companies saw as players were trying to distract themselves from reality while sheltering in place. That has made people want to do things on the platform that are more metaverse-like, such as having birthday parties on Roblox.
“People do everything from playing traditional games, to social experiences that are more around hanging out and just being together whether it’s working together in a restaurant or running away from a tornado,” Baszucki said at our conference. “And in the midst of this very difficult time, we’ve seen a lot of people using Roblox as a way to stay connected, whether it’s trying to have a birthday party, or how do we graduate from high school.”
Baszucki has done a couple of events with Ernest Cline, the author of Ready Player One and Ready Player Two. I asked Baszucki if he identified with the characters in the book who created the Oasis, or the book’s version of the metaverse.
“When Ready Player One came out, I sent it to all the executives in the company because it was capturing not just societal changes but what I thought were visionary technologies that we were going to see play out as these platforms got better,” Baszucki said. “We really try to fade into the background. So I’m not sure either one of those characters applies to us. We don’t make any content. We actually don’t have control of the content. We try to make really good technology and tools and a platform. And then we get amazed by the content.
“We almost see ourselves more as the creators of a primitive part of the electrical grid, back there in the distance, and we’re trying to more and more highlight the creative genius of our creator community, which is really the real engine that works with us to power our part of the metaverse.”
Baszucki compares what Roblox is doing to the invention of the printing press. The tech was so new that some philosophers at the time felt that people started reading too much. Over time, the culture came to accept book reading. Video went through the same cycle, as are games now. I joked that parents will one day tell their kids to stop reading and go back into Roblox to learn something.
“People will know they have a physical identity and a digital identity,” he said. “Just as people that are very facile with books and videos and balancing them, we’re optimistic they will be with the metaverse as well. We’re not so dystopian in our vision relative to maybe some science fiction. We think people will be able to balance this and use it in a positive way. We think it will be an integral part of learning and working. Just another tool side by side with video and books and other forms of communication.”
Amid the pandemic, Baszucki said he has enjoyed seeing experiments in Roblox like concerts and parties that enable people to enjoy each other while socially distanced.
“We’re hopeful that there are many situations where immersive 3D communication can bring people together, where it’s very difficult when they’re forced to be at a distance,” he said. “An example would be our Roblox holiday party, which we did in Roblox with hundreds and hundreds of people. And because they were all employees, we were able to do the things we might do at a holiday party. I wish we could have been together physically. But we did have a nightclub. We did have a stage, we did have a bar.”
The race for the metaverse
I define the metaverse as a place where we might spend many of our waking hours, working, playing, and learning. And by that definition, Roblox is very close to being the metaverse, or the Oasis, along with other games like Microsoft’s Minecraft and Epic Games’ Fortnite. I spent Thursday evening on a panel about Roblox in Clubhouse, the social audio chat platform. Yonathan Raz-Fridman, CEO of Supersocial, was the moderator. He’s one of the true Roblox believers, as his company is making games for the Roblox platform. His company’s tagline is “games for the metaverse.” And a lot of people in the room were asking questions, as if they were wanting to believe.
I remember it was news back in 2017 when I wrote about young adults and teens making enough money with the games they built in Roblox to pay for college. Now, developers like Supersocial and Israel’s Toya are creating big teams to work on Roblox games. They’re betting that Roblox will become the metaverse. Baszucki, however, is excited that individual developers are making life-changing money on the platform.
The incredible momentum has set the San Mateo, California company up for a huge public offering. On January 6, Roblox said it raised $520 million in funding from private sources at a valuation of $29.5 billion, or more than seven times its value from its previous funding less than a year earlier. That funding round took the pressure off the company from raising money in its public offering. Instead of doing that, Roblox’s employees and shareholders will be able to sell stock on March 10, but Roblox itself will not raise money. This is called a direct listing offering, or DLO, instead of an initial public offering, or IPO. The DLO will help establish Roblox’s trading history, just as the private funding did. That means that when Roblox does decide to raise money for itself later on, it will do so at close to market value — leaving no money on the table.
You see, when a company does an IPO, the investment bankers often sell the stock to hedge funds and other friends, who can get the stock at a low opening price and then sell it quickly during the “IPO pop,” or the typical rise in a stock price on the first trading day. The bankers and the investors often get rich from that trading day, but the company doesn’t reap as much from the IPO as it might. With the DLO, Roblox reduces the risk that it will leave money on the table.
But it’s no guarantee that Roblox’s stock price will go up. The company recently reported that it lost $253.3 million on revenues of $923.9 million for the year ended December 31. With a value of at least $29.5 billion, Roblox would be trading at around 30 times sales. Before the last couple of years, game stocks often traded at around three times sales. Roblox’s shares seem ridiculously overpriced. It has some higher costs, in part because it pays 30% of its revenues from Robux, its virtual currency, to players who create games.
Should you buy the stock?
I have to say I am not in the business of recommending stocks.
It could be very risky to bet that Roblox’s stock will go up. The question at hand is whether this belief in the vision of the metaverse — and Roblox’s advantages in getting there first — justify the outsized valuation for Roblox’s shares. The very fact that a company like Roblox can go public by losing such large sums of money tells you how frothy things are.
By comparison, game engine maker Unity raised $1.3 billion at a $13.6 billion valuation in an IPO on September 18, even though it is losing money in its quest for market share. Unity’s value rose to more than $40 billion, before it posted a wider loss and saw its value fall to about $26 billion now. The market highly values companies with a lot of potential, but the market is also quite volatile.
Glen Anderson, president of Rainmaker Securities, handles trades for the secondary market, where shareholders of private companies can sell the shares they own to other parties, often before a company goes public. It provides additional liquidity in the market for employees who often don’t want to wait for a public offering. Last year, Rainmaker handled $1.3 billion in trades.
With Roblox, Anderson said his traders saw a lot of people interested in buying shares recently, but very little interest in people selling shares. That means that employees and shareholders are excited about the direct listing and they’re waiting to get better prices after that. Sometimes companies will use these secondary trades to get a sense for where the market place will settle.
Roblox still has a lot of things going for it. The company’s bookings for 2020 were $1.9 billion, double what they were the year before. The company’s free cash flow, or money coming in the door, was $411.2 million in 2020, significantly more than its net losses.
Roblox said that, as of December 31, it had over 20 million user-created experiences on the platform. In 2020, over 13 million of these were visited or used by the community. The community of active developers is above 8 million. Over 1.25 million developers earned Robux on the platform. About 4,300 earned more than 100,000 Robux. Over 1,250 earned more than $10,000, and 300 developers earned more than $100,000. Three developers earned more than $10 million.
In terms of upside, Roblox had only 490,000 daily paying users in 2020, out of the 32.6 million coming. If Roblox can raise that number of paying users, it could significantly improve profitability. It has opportunities to bring in more users through its live music events (like its Why Don’t We launch event today and this weekend), and it could also start experimenting with non-fungible tokens, or blockchain-based identifiers that could authenticate one-of-a-kind collectibles. Those NFTs have become hot commodities, generating a lot of money for musicians, artists, and gamers. But so far, Roblox hasn’t had to resort to either crypto or NFTs to make money.
And here’s the thing that maybe the bears about Roblox don’t consider. Those 32.6 million daily active users — who are something like 150 million monthly active users, or people who come to the platform at least once a month — can be the WallStreetBets-style supporters, much like those who championed GameStop against the bearish short sellers. Roblox has an army of user-generated content creators, and those people would probably jump at the chance to own a piece of the metaverse. Disney and Lego are probably quite envious of Roblox.
We’ll see if the Roblox army comes out in force on Tuesday. I would caution everybody about getting too enamored with any stock, especially in a jittery stock market like we’ve seen this week. But I also wouldn’t stand in the way of that army.
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