Chit Chat Stocks - Roblox Revisited (RBLX) | Not So Deep Dive

Episode Date: February 15, 2022

Roblox develops and operates an online entertainment platform. The company offers its users access to a 3D world and the Roblox Studio where users can create and publish 3D experiences. Listen closely as Brad, Brett, and Ryan go through the history, financials, and future prospects of Roblox. Enjoy the show! Our Tuesday Not So Deep Dives are sponsored by Potential Multibaggers. Multis are looking for stocks that have the potential to go up 10x in 10 years. Check-out the service here: https://seekingalpha.com/checkout?service_id=mp_1308 Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to 7investing with the code "CCM" and get $10 off: https://7investing.com/subscribe/aff/4/ Interested in more of Brad’s work? Find his Substack: https://stockmarketnerd.substack.com/ Contact us: [e-mail] Timestamps Company Background | (3:40) Industry | (10:03) Management & Ownership | (12:01) Valuation | (16:47) Earnings | (18:40) Balance Sheet | (20:58) Our Analysis | (22:00) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not-So-Deep-Dive episode on Shit Chat Money. Today, we're going to be talking Roblox. And this is one of our first revisited episodes. So this is going to

be called Roblox Revisited. Roblox, we covered in 2020, right at the end of 2020. So about a A year and a half ago, we covered them right before our IPO with Ian. But today we have Brad on the show. Brad, have you talked about or researched Roblox before? Do you know anything about the company before you got prepared for this episode? Just because of how much I'm on Twitter, I've definitely seen people talk about it, but I haven't myself dug in at all until today. All right.

And Ryan, I know you followed them, but how much recently have you followed this company? I still look at earnings just because it's pretty interesting business. And this was really one where everyone thought COVID was kind of the peak. And I'll kind of talk about that. I'll give some context into what we talked about last time we visited them. But it's kind of evolved since and it's proved out to be a bit of a sustainable platform. So it'll be kind of nice to talk about the evolution that we've seen over the last year. Yeah. This is one of those companies that kind of climbs the wall of worry or has climbed the wall of worry. So that could be the kind of story here, but I'll let Ryan really talk about the context and what they do for any of some of that. I should also mention that Brett is in Mexico. So if you hear any lag or if we interrupt each other, just bear with us because we're no longer in the same room. Yep. We have three people on Zoom now, but let's get into the show. We're going to talk about our ad first potential multibaggers. So the aim of potential multibaggers is to find stocks that can go up 10X over the next 10 years or compound at 26% per year. This is a service, an investing service that is trying to find those high growth, high quality compounders.

For example, they pick things like Shopify at $77 a share. That was actually their first pick ever. So coming out of the gates with a fantastic recommendation and then Cloudflare at $39 a share, plenty of others. Potential multibaggers picks stocks, high growth stocks to hold them for a very long period of time. Of course, they have to continue performing well to hold them. So Pris and the team behind Potential Multibaggers calls this buy and verify. So they're going to be giving you research all the time. Basically, I don't get emails to my inbox every day, but at least once a week and typically multiple times per week, especially during earnings season, giving you updates on how a company is doing, whether they're going to keep a position in the

portfolio or take things out. It's a fantastic service to go along with yourself if you are a high growth investor. And if you want to become a multi and join the service, you can go to Seeking Alpha and look for From Growth to Value. Google it or go to at From Value on Twitter. All right, Ryan, do you want to introduce Roblox and give some context of what we were thinking and the market was thinking during the late 2020 period? Yeah, so I'll start with the business model for anyone that's unfamiliar. I think a lot of people have probably heard of Roblox, whether you have kids that play or just have heard of the game in general, it's pretty popular.

So their mission is to build a human co-experience platform. uh pretty much it's an online platform primarily engaged with through mobile um mobile devices where users can find games that have been built by developers so roblox itself is not a game but more of a virtual world where users can look to engage in different experiences that are created by other users so there are 27 million active user-generated experiences to choose from and And then Roblox, you basically have this avatar, which I think is called your Bloxy or something like that. And you can basically go into all these different experiences, different kind of worlds.

And some of them are games, but some of them are like you're delivering pizza. It's not even a game. It's just kind of like an experience that you're in there for. And there's a really social aspect to it. that's kind of what's driven the, a lot of the user adoption is this is sort of the digital playground. I think a lot of people have used that word before where kids are interacting now. And so I guess in terms of how Roblox makes money, there's the, so they have their, it's free to download and then you can purchase Robux, which is their in-game virtual currency.

You can spend those Robux in the different experiences and that, it varies on depending how the developer wants you to spend money. So let's say the developer creates, so there's a Grand Theft Auto type game within Roblox. Someone's created basically a Grand Theft Auto world. He or she could say, if you want the nicest new car, you got to spend this much Robux, essentially. And then the developer can either cash that out for real cash, or they can keep it within their ecosystem. So within the Robux, and they'll keep a higher take rate on that if they keep it as Robux. And then the developers can spend Robux on different, like there's a developer marketplace. So you could buy something that another developer created with Robux and you

get to keep more of it if you keep it that way. And then eventually you can obviously cash out and Roblox takes their portion of that, which I think is like 75% take rate for Roblox. If I'm getting that right, that's kind of just off the top of my head, but Yeah. I believe so. The developers, I don't have the exact number in front of me, but I think over the last three months, they kept 26% of revenue. I think they want to increase that over time, but it is about a 75 split to Roblox, the company, 25% to the developer right now. Different Roblox. Yeah.

Yeah. It's quite a takeaway. And then it has really grown almost into, like I said, a cultural phenomenon. This is the the digital playground. So for reference, 50% of kids in the US under the age of 16 played Roblox in 2020. And then three quarters of kids ages nine to 12 in the US are on Roblox. So it's super popular. If you're trying to picture this in your head too, and maybe you've seen pictures of Roblox before, the graphics are a little blocky and they don't seem super realistic. Although So some of the experiences are becoming more realistic and the worlds that are kind of built within this platform are becoming more and more, I guess you could say, immersive.

They don't feel as like childish, I guess. It really depends how the developer builds it. And then I think that pretty much, unless I'm missing anything, there's 10 million developers and 47 million daily active users. And so I guess this is a good time to go back and add some context. We looked at this right before their IPO, and they IPO'd at a market cap of like $38 billion. Today, they stand at $40 billion, roughly. And at the time, our biggest concerns were, can this scale up the age demographics?

Can they retain users as they grow older? And I believe it was also around sustainability. and all of that has proven out so daily active users went from 31 million last time we talked to 47 million today the 13 and older has been their fastest growing bracket of age demographics and hours engaged has continued to go up as well so sustainability has all proved out this last year despite quote-unquote tough comps um and then i guess as far as history goes the company was It was, I guess you could say it was started in 1989 because David Buzuki, who's today the CEO, and Brad will talk about him, developed a simulation software program for, it was

basically like educational simulation software for physics. And he built that into a company called the Knowledge Revolution. And at the time he hired, or at some point during that company's existence, he hired Eric Cassell to the company. And then they ran that until 1998. they were acquired by another software company in 1999 for $20 million. And they worked there for about five years. But in 2004, both Eric Cassell and Dave Buzuki left to found Roblox. They officially launched the product in 2006. And then they've obviously evolved the platform

little by little since then. And I guess the good thing is the platform has evolved a lot on its own. And so really their job is just to build the tools for developers to build the platform. And then I guess other notable things, Eric Cassell unfortunately passed away in 2013 and the company IPO last year. So March 10th, 2021, it's been almost a year. There is not a 10K out yet, but it should be out soon. Yeah. I don't have the industry of landscape competition. Gosh, this is a unique business. So they're really building out their own model And they tried to say that they're TAM, you know, quote unquote, I know we're not big TAM fans here, but they draw on three different categories. And that is entertainment in

general. So think more like video entertainment, movies, that type of stuff. They're competing with social media aspects, like Ryan mentioned, is a very social platform. A lot of the kids on there are treating it as their social media. And then they also compete with video games. And that's the one most well known to people. So they're competing kind of as the YouTube of video games but again it is more for the younger kids right now each of those categories has over 100 billion dollars spent on it a year so you really don't there's no addressable market concerns with this company it's they can if they execute on their plan they can be as big as they possibly want and each of those categories has billions of users or watchers or whatever around the globe

essentially their potential user base and this might sound like i'm uh pulling a little smoke here but it it converges to the entire global population over time if they can execute on what they uh are planning here so again it's it's all on execution for them industry it's not really too much of something i don't think you need to analyze because it's not about the industry they're building out their entire new like an entirely new industry on their own however they have tons and tons of competitors that includes mobile gaming companies probably first and foremost, social networks like Instagram and TikTok, but really the stuff like Snapchat or maybe even YouTube as well that are focusing on the younger people, maybe people that are under

24. And then video and movie entertainment, essentially, again, it's a very wide competitive landscape. They're competing for time spent on digital entertainment. And that's kind of how I always like to think about it. All right, Brad, you want to talk about their management and ownership? Yeah. So the founder and CEO, or one of the founders, I guess, and CEO, RIP to Eric is David Bisaki, as Ryan talked about. So he's been a serial entrepreneur throughout his entire career. As Ryan talked about, he founded Knowledge Revolution, which became, and I quote from LinkedIn, the volume leader in educational physics. He also founded Bisaki and Associates, which was an angel investing firm. He was only there for two years. He was a vice president and

general manager at MSC Software, which is, and I quote again from LinkedIn, the world's largest vendor of mechanical simulation software. They actually bought Knowledge Revolution. He founded Revolution, worked for this company for a few years, and then he founded Roblox 17 years ago. He's not one of those founders and CEOs who worked for Google and climbed the ladder there, so he doesn't have a ton of notable experience, but every single thing he's touched has succeeded meaningfully. Roblox is certainly no exception, and he's got an 88% Glassdoor rating, which we always love to see with a few hundred reviews. The chief product officer probably has the most impressive resume on the executive team. It's Manuel Bronstein or Manuel. I'm sorry. I'm not

sure which one it is. So I apologize if I'm wrong. He's only been there for a year. He's a board of directors member at the New York Times. He was a former VP of Google Assistant for three years. He was a former VP of product at YouTube before that as well. He's been a VP at Zynga and Xbox, and he also worked for AOL, but we will try not to hold that against him because his other credentials are very solid. But joking aside, the chief business officer is Craig Donato. He's a former VP of business development at Nextdoor.com. He actually led them to monetization. And then he was a former VP at QVC, which it's the television channel where you shop, like Laurie Grenier, or the Shark Tank lady is the QVC lady. So I don't really know about QVC

other than that, which is a little sad, but that's okay. The CFO is Mike Guthrie. He's been there for four years. He's a former CFO at Trucar. That's his most notable experience. And then ownership. So Dave, actually, according to the most recent information we have access to, I believe there has been some insider selling. And I also believe that we'll get a proxy statement soon that will update these numbers. But as of the last official direct primary source we have, Dave owns 100% of the Class B float and 1.7% of the Class A float for 70% of the voting power. Altos Ventures owns about 7% of the voting power through their hefty stake in class A, which is around 24%. They actually bought $350 million in stock in April 2020 from a lot of selling

executives. So I thought that was interesting to note. It looks like Dave's brother, Greg, who also helped him with Knowledge Revolution and has been involved with his professional career from the beginning, really. He owns 3.2% of Class A. And then none of the other executives are mentioned as having hefty stakes in the company. I mean, I'm sure they have options packages, which will mature and pay them handsomely. But it also looks like Class A is mainly, aside from Dave, owned almost entirely by institutions. So very small float being traded, it looks like, via the really hefty institutional ownership. And Ryan, what's up? Yeah. We actually talked to Honam. Brett and I talked to Honam a while back who runs Altos Ventures. And we talked to him about Roblox and they invested really early. And I believe they invested pretty much throughout Roblox's life. As they got bigger, they continued to invest in it.

And Honam said he continues to hold, even though they're a public company today. And like you said, they've been buying from the selling shareholders. And so it was kind of interesting to see how much, from his point of view, it was really like a people's business. And that was really sort of a time arbitrage thing where his time horizon was much longer than everyone else's. And he's like, we like Roblox and I'm just going to keep owning it. I have no reason to sell.

So it's pretty interesting to hear it from his perspective. Brad, did you have anything to add? Yeah. Altos Ventures publicly, they've said that they really, really think strongly of Roblox's management. And it's tough because it's just kind of anecdotal and someone else saying that, but it is nice to see because management is so important for a business like this. But I'll hit valuation.

Brad, you talked about stock options and yeah, that was a good teaser. They got a lot of them out there. so market cap is 37.29 billion dollars so basically 37.3 billion dollars ticker is rblx enterprise value is 35.4 billion dollars so they have a good amount of cash on the balance sheet and as ryan will go into uh they are cash flow positive so i think the ev is the relevant metric here trailing 12-month ev to bookings is 13.6 now bookings you might be confused with if you don't follow the video game industry um we don't need to go into the exact details but in all reality for roblox bookings are revenue um and their ev to bookings is 13.6 so pretty expensive compared to

a lot of the other video game companies but not you know in the 20 or 30 range like a lot of the high growth stocks are trailing 12 month evita free cash flow is 58.9 so very expensive those are really the two things i'm looking at from a multiple's perspective their net income gap earnings get totally messed up because of all the deferred revenue they have to do. So really, I'm looking at free cash flow. We're not trying to slap on a multiple for this company. 156 million in total dilutive securities outstanding right now versus 578 million total shares outstanding. This includes 57 million that are available under the equity incentive program. So it's hard to tell when this is all going to come out to the common shares outstanding,

but dilution is likely going to be 20% to 30% cumulatively over the next five to seven years. However, this is maybe better for people that hate dilution, which as a long-time listeners of the show know, I'm kind of a hater on stock-based compensation and stuff like that. They have only granted 8 million dilutive securities through the first nine months of this year. So that's hopefully a better pace than what they were doing as a private company. All right, Ryan, do you want to hit earnings? Yeah, their bookings for the first nine months of the year were basically $2 billion. And that was up 58% versus the same period a year ago.

And like Brett said, pay attention to bookings over revenue. They have to recognize revenue over the life of Robux purchases, but really it's cash in the door. Bookings is representative of actual cash that's coming in the door. And then free cashflow for the first nine months was $481 million. So 36% free cashflow margins. As Brett said, they do spend a hefty chunk on SBC. So keep in mind that 20 to 30% roughly dilution number over the next five to seven years. They had 47.3 million daily active users. That was up 31% year over year. Hours engaged were up 28% year over year. Their average bookings per daily active user was actually down a little under 2% versus a year ago. I believe a lot of that is probably due to their international expansion. So Asia Pacific was their fastest growing region for users. That was up 75% year over year, while US and Canada was up only 6%. So if you have areas that are growing really quickly that have lower GDP per capita,

they're probably just likely to spend less. And that's probably going to drag down your bookings per user. And then users 13 and over was growing 48% year over year, whereas users 13 and under was going just 20% year over year. So they are really either their user cohorts are sticking with them as they age, or they're adding new users that are older than 13. They're attracting those as well. And that is really answering a lot of analysts' concerns because they're able to attract them. And I think they account for, I want to say, it's more than 50% of overall users are now 13 and older. So they are, and I don't know if that just means 14, but it's good to see

them kind of aging up with the platform. Brad, you want to hit balance sheet and look what it is? For sure. So the company has about 2 billion in cash and equivalents on hand. It raised another billion in senior notes at a 3.875% interest rate in October, 2021. That's pretty much its entire debt load, I believe at this time. And then it's free cashflow positive, as we talked about. So yes, there's some debt, but the interest rate is really favorable. It's profitable and it has a lot of cash on the balance sheet. So nothing really concerning here. Yeah. Great balance sheet. That note, that senior note they put out, it's interesting that they did that because it kind of indicates to me that they want to reinvest really heavily right now

because they don't really need that. And they're not really in a position to buy back stock that would be anything meaningful so the fact that they did that on 2030 note i believe pretty cheap interest rate it kind of leads me to believe that free cash flow might be going down in the near term because they see a lot of room for reinvestment but that might be reading through the tea leaves too much um either way really really clean balance sheet all right let's hit the ad break we'll get back to more analysis on roblox stuff cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all

your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wifi app restriction supply all right welcome back in next up we have anecdotal evidence we'll kick things over to brad first what do you have for us yeah i'm not i'm not a much of a gamer outside of backyard baseball growing up and ncw football dynasty mode was my favorite so our ip there and hopefully we'll get it back soon but yeah no roblox uh evidence for me for me it's yeah i haven't really played roblox but i watched a lot of videos kind of prepping for this like just youtube videos of uh trying to get like a grasp on the roblox platform and some of the

experiences looked pretty sweet there's like i i looked up most realistic roblox experiences and there was like 10 that were basically just replications of other games within the roblox universe and a lot of them or just not even not even games like just digital media worlds um Um, and they're pretty cool. It's like, I could, I can see the attraction. I could see how you spend. I think there was people were spending on average, like 2.6 hours a day on roadblocks during, I think that was a number in the S one.

And I could see how you can just kind of get lost in it and just play it nonstop. Um, Brett, have you played it at all? Yeah. I mean, I downloaded it for anecdotal evidence purposes, got lost right away. mean it's too young for focus for us right now i think um as if anyone that looks at the videos it really is majority of it's focused on you know younger teenagers and i don't know it seemed proud it seemed crowded for me um i had a hard time finding like what a game would be but again i think that's just because these are more social experiences for kids but on the flip side that

kind of makes me think how difficult is it going to be for them to get that 20 to 30 year old cohort age cohort because are they going to have to make things like fully separate are they going to have to really get their discovery algorithm up that's something that it's it's going to be uh i don't know it's something that we'll probably discuss in our highlights and highlights and maybe uh bull case bear case more interested but i did end up watching part of their long investor day that they recently did in november it was four hours so i can't say that i watched every single minute of it maybe only an hour of it but the team scene is very sharp um the stuff they are working on specifically with audio stuff and then visual where they have this cool thing where if a camera

is on you and then you make a facial expression now some people might think this is a bit basic but if like you have a camera on you you make a facial expression your avatar copies it pretty you know closely so that's kind of cool very uh difficult things they're working on technologically to get these avatars really lifelike. And hopefully that leads to more profits down the road. All right, let's move into future growth opportunities. Brad, what do you think Roblox should be working on or maybe could be working on?

Yeah, programmatic advertising. I'm thinking about all these new virtual worlds that can be lined with billboards and brand sponsorships and all of those things, just like the real world is. And hopefully Trade Desk will have a big piece of that Like they, like they're having for Walmart and Home Depot and all those other companies. But that point aside, um, even, I mean, within these virtual worlds, it's really easy to show 10 different people, um, the same billboard within a virtual world with 10 different ad

placements that are each more relevant to, to that one person. So there's a lot of flexibility here and a lot of ability to target, especially considering they have this massive base of first party data. Um, yeah, I think they could, they could, they, I'm sure they are doing a lot here and I think they can probably do a lot more over time. I think they want to, so there was an interesting question on the conference call where someone said that like there were other companies being set up that would put, that would advertise for brands in Roblox. And they basically said like, do you have any plans to like sort of like remove them in sort of the value chain? and they it sounded like they really want their advertisements to be unique like brands being

able to do really sort of like uh cool experiences like so artists do concerts on there or uh i mean brett you're going to talk about some of the fashion ones that you've seen like the you can just build your own world it wouldn't make any sense for some of these i i wouldn't think it makes any sense um but brad do you want to get into yours uh yeah i mean i just wanted to add on to this with the advertising part they are really like holding back on the potential here because i think the average player or average daily user is on roblox for 2.6 hours per day so if they were kind of under the facebook mindset maybe or you know something like that they could be monetizing this extremely heavily um and probably generating i don't know maybe not

10 billion but you know at least a billion in advertising revenue if they want it it kind of you know this tells me that they're playing the long game here and they're really focused on something that is not like they're going to add advertising over time and that's definitely something that you know brad you're talking about that they are focusing on that but they're not just going full you know kind of all right we're going to throw on an ad every every 30 seconds for our players right did you have something else dad yeah it's just like my question is how does that bog down the user experience at any point like it's such a fine line you know yeah i guess history proves no because almost all the other social platforms are able to do a pretty high way higher

ad load than roblox but it is kind of nice that they're so profitable without having to do that at all yeah all right what's your uh what's your future growth opportunity yeah i think you know it's fashion like you alluded to as everyone knows um you know i'm really out of the fashion world no that's it's completely opposite but if you're older they're this type of fashion stuff within roblox could seem strange and it definitely is strange but they had stuff called like gucci gardens and this british award show that was put on as you know the within i don't know if they're i think they were probably just certain like games almost where like you go to this mode and then there's gucci gardens i don't really know what it was but these can be big monetization growth

drivers for roblox because the avatars are a huge part of this platform so there's no surprise that people are willing to pay for luxury goods because that is kind of their well it's not kind is their identity within the roblox universe this avatar that people are building um customizing and buying clothes for um it tells now all right ryan did you go with yours or do you still have to go no i i still gotta go and it's just like so the thing that i was thinking about this for a while like how do they grow like on their own how do they like proactively grow and so even like your example brett is like that isn't them doing it that's just like organic like brands are like getting in the game and adopting these like like trying to build their own experiences and that

obvious that generates revenue for uh or generates bookings for roblox but it's not them there's nothing new there like for so for example they have like uh different like partnerships i guess with brands like the nfl they just launched one with uh chipotle there's a vans world and i'm not really i don't really understand how people like are like getting chipotle in in roblox but um i guess it's they're kind of using it as just a way to get the message out there it doesn't for me i just don't see ultimately the name of the game for roblox is giving developers the best tools and allowing them to build the platform on their own i don't see what would be the next step as far as like i guess ensuring safety on the platform and building tools is

really just the name of the game for them i can't think of anything else yeah and i would note that they're possibly reaching out to these people but i think a lot of times people you know brands are reaching out to them because there's what almost 50 million daus probably 50 million daus on roblox Now, these companies want to get exposure to those people that are on this platform for two to three hours a day. All right, let's move to highlights and lowlights. Brad, what do you like and dislike about this company? Yeah, I mean, the highlight is in an extremely broad brush and general point of view is just, I mean, their execution over the last 17 years since this was founded has just been consistently admirable. So there's been very little execution drama with this company, besides that short report that came out that kind of seemed ridiculous to me, even though I don't own shares. So I like to think I'm a little, or I can be objective there.

And yeah, I mean, how culty this seems within people that are five to 10 years younger than us is just pretty darn impressive. i mean the only other brand that comes to mind that that has garnered this kind of support from a from a community is barstool um and i love barstool and penn national gaming for that very reason and then brett uh what's up do you uh do you want to go through what that short report was because it seems like at first that type of thing can seem kind of um like a huge downside risk for roblox i can explain it too oh yeah go ahead basically there was a substack article that came out um that cited a bunch of uh incidents of predator type interactions on the platform so a lot of people uh it's sucks that this exists in the world but uh there was like a lot of pedophiles

uh exploiting younger people on here by bribing them with robux um and i mean that exists it exists everywhere on the internet unfortunately but um that's a big problem with youtube as well that's a scare that's obviously a scare for parents yeah yeah they're focusing a lot on their trust and safety stuff. And that might just be, I know they talk about it, like every conference call and every, they talked about it a lot during the investor day, but it is good to see that they really, they're trying to invest heavily into the trust and safety and doing

it in a way that's not like Facebook, where, um, they're just throwing on 10,000 contractors or something like that, where it seems like they're slapping a bait on it. Roblox hopefully is doing something that's way more permanent, although the platform does lend itself to stuff, lend itself to stuff like this because you have people chatting with each other, exchanging of the virtual currency, all that stuff. But Brad, do you want to continue on with your highlights and lowlights?

Yeah, I'll do lowlight. But just, I mean, while we're mentioning Facebook and Metaverse, if Zuckerberg is ever allowed to make an acquisition of anything ever again, Roblox, and the huge caveat is it's founder led and they've had immense success and there's probably a low chance of them wanting to sell. But Roblox tucked into Facebook and Oculus sounds really compelling to me. But that aside, I'll move on to the low light. So also considering Facebook and then also now with Microsoft buying Activision Blizzard and talking about this open app store for gaming, the richest companies in the world are now trying to compete more directly with Roblox. And as a low light, that's about as good as you can do, because the better you do, the more appealing your industry is, the more common this occurrence is going to be. And it's proof of concept for how lucrative this opportunity is. But at the same time, they're the richest companies in the world and they're trying to compete with the roadblocks.

So that's something to keep in mind. And there's really that's the low light. So, I mean, if that's the low light, that's usually a pretty good sign in my view. Yeah. Yeah, I mean, the. or go ahead i'm just gonna hit mine and uh then i'll put press it over to you brett but the um the highlights for me this is just a wonderful business all around and it's run by a good manager i mean if you're thinking of like ideal business models this has pretty much everything

there's a total flywheel effect there's user generated content um and there's even there's a network effect to some extent as well. I think a strong one. Yeah. It just, it's, and it has tons of optionality. So as far as just qualitative judgments, there's, this is a great business. Low lights for me though, I, there was the, I mean, they really got to invest heavily in the trust and safety stuff because that can present some like terminal sort of club penguin type risk where if this gets to, if it becomes like a really serious issue, like, and there's like this stigma from parents, like they're not going to let their kids on. But I mean, that's just on them to basically invest in the trust and safety

stuff that other than that, there wasn't any big low lights for me. I really have some questions that if I were going to invest, I wouldn't. These are sort of the questions I'd be looking at, which is can they evolve enough to attract older people? And that means beyond

just retaining their existing users as they age. I mean, can they really go out and attract new older users? And then how sustainable is the platform? I think it's pretty sustainable. I think it's pretty YouTube-like,

But it always feels sustainable. Gaming is just, unless you have a really durable franchise, it's very, interests fade quickly. Or maybe they don't fade quickly, but they stall out. Do you guys agree with that? Disagree with that, Brad? I think I'll just say, I came in to Roblox thinking that exact same thing. But your point about how many developers they have on their platform actively building them content, it just seems like now that they've built this massive base of users and of developers, all of the new compelling content will just be built on that platform. So I'm not sure if that'll actually be the case. But I think that is a much higher likelihood, just based on how their business model operates. yeah yeah definitely i agree the developers part should hopefully mitigate that risk however they're going to have to evolve from these um blocky kid games eventually because i gotta think that type of stuff is going to get tired over time eventually it's going to have to get way more and way more immersive um not only to retain those younger users but to convince the older users to come on some of the experiences while cool and obviously have gone super viral to have so much time spent on them are a little lacking in um in graphics right now but they've

obviously made up for that lack of graphics so far um ryan did you have anything else on how it's always no okay i'll move into mine i mean i do like how much they're doing with the vertical integration mindset so they run their own cloud that's something that's outside of my area of expertise of kind of going through the details of it but they do highlight that as something that's going to help with their margins long term i think they even talked about designing their own ships but that might be a few years down the line they have phenomenal cash conversion even looking at their bookings um because you know bookings is a lot higher than revenue right now and i think they have a strong competitive advantage versus anyone else that is trying to build out something

that is similar to roblox now i think this is very similar to youtube where no one is going to be able to build a user generated content video platform however there are still competitors to YouTube, which would be, you know, Netflix can still exist and be a competitor to YouTube. Roblox is going to have many competitors say, you know, Take-Two Interactive, Microsoft, Activision Blizzard, whomever. But for anyone that's trying to build and copy their business model, I think it's virtually impossible. Lowlights, let's see. Average booking per player is down over the last four quarters, and then there could be a short-term blip that's happened to them in the past and like ryan mentioned that could be because apac is growing

so quickly right now and they had to kind of catch up with that over time i would watch that's something i'm going to be watching though um and then the massive from an investing standpoint um they're going to have to spend a lot on trust and safety like we were discussing so as opposed to say a gta online a grand theft auto online or a call of duty online where not like the whole point of it is to be like a dangerous stressful situation for people that are like older the age of 18 or maybe older the age of 15 obviously you don't pedophiles or anything on there the whole point is that it's a kind of a dangerous world in gta or cod in roblox it's the exact opposite they have to have all these things in there i just worry a bit that that trust and safety spend

is going to be you know 10 maybe 20 of revenue consistently and that's not detrimental but i But I think that could hurt their margins in the long term. And then maybe the biggest low light for me is DAU growth stalling in the U.S. and Europe. Could be, again, short-term blip, but it's been a few quarters. And if that continues, I worry about the age-up stuff and whether it's going to be quickly as they think it will. Because if they can age up on their platform over, say, two decades or something like that, But in reality, with their valuation, you're going to need to see age up within the next three to five years specifically to that 17 to 24 age group. And if DAUs are stalling in the U.S. and Europe, I don't think that's a great sign.

All right, let's move on to old case, old threat, raniism. Yeah. I mean, like I mentioned, three quarters of kids 9 to 12 years old are on this in their more mature markets. So I think people have to be serious about market saturation. It's going to be the only way they're going to expand those DAUs is if they can age up. I mean, they can fill and replace as people age. But to really, really grow that DAU line, they have to go to older, especially in their more mature markets, they have to go to older people.

100%. at least definitely but in a pack at least you have more potential users i mean that was growing 75 year on year and they have like i want to say like almost 10 million da used there so yeah there's just a partnership with tencent too yeah i mean they could have 100 million well maybe not 100 million da used but i mean uh china is the biggest gaming market in the world that could It could be potentially lucrative, but there's that added risk there. Bull case, though. Brad, what do you think would go right here to make this a good investment over the long term?

Yeah, the bull case is that this is not a fad. I think Club Penguin was a good comp, but that this is, I think, more of a revolution in that us younger, or I guess, Gen Zers and the younger Gen Zers, because we're old Gen Zers at this point. But I think they just continue, like we're saying, to grow up with this game and with this platform and developers continue to create great content on there instead of on Microsoft's or Facebook's or whatever. And yeah. Yeah, for me, the bull case, I guess a few things I'd like to see by, I said 2025 on my notes here, but within five years, a few things I'd like to see are 100 million total daily active users. steady to positive average bookings per user figures, and then 70% of the users being 13 or older. If they can do that, I think this is going to make for a good investment. And then also, I think free cashflow margins could potentially reach 50% here. It really is a wonderful business

in terms of cash generation. Brett, what do you have? Yeah. One note on the cashflow margins. Um, the free cashflow margins on revenue look very attractive right now, but on bookings, it's a little less attractive. So I think 50% could be in the cards if app store payments fees, um, I think they're like 20 to 25% for them right now. If those go down a lot, 50% could definitely be in the cards, but I would be hesitant to say it could reach 50% if app store fees, um, do not come down. Uh, but who knows? Uh, all right. Mine, i mean here i have like four questions i think i'm asking myself as someone who has roblox on a watch list can they grow internationally i think that one's pretty quick yeah definitely

can they age up can they maintain engagement and can they maintain monetization levels over the long term which would be for me over the next five to ten years i think if you can answer those four questions with any sort of level of confidence there's a good chance this will be a long-term compounder uh because i mean the video game spent worldwide is probably going to approach 300 billion within this decade that they could easily be doing 30 million in bookings they could be doing 50 billion in bookings if they really catch fire and age up um that might seem like a really long ways away from here but if they can age up i mean 20 to 30 year old video game players spend a lot of money the upside here like the ceiling is incredibly high with one of the high i mean

i don't want to say again this sounds like a half-baked thing it's almost infinite upside it is i mean it's kind of never ending tam tam is just planet earth every everyone's well it's not planet earth because it's fake there's no it's not everyone's bully everyone's case is basically like the ready player one oasis it right if that plays out we'll we would have been haggling over bookings like a bookings multiple and then i don't know yeah there's there's a very high ceiling they do they did mention on the investor day bazuki said this kind of as an offhand comment he said once we go vr um we're gonna go back what sorry brad once you go vr you never go back that's true you never take the goggles off so once they go vr he said

this that uh they'll be even more immersive which i think is obvious but it's kind of you know they're thinking about that type of stuff whether the next gaming paradigm is here i'd also like to see them get on the switch i don't know if nintendo is saying we don't want them as a competitor because they are kind of you know competing with some of our biggest um user base but i mean roblox pays them point percent you know nintendo is on the switch is it now i don't i think it's only no never mind you not never mind it's not yeah that's been a big hold up for them um i wonder who is the hold up whether it's roblox or nintendo both of the companies are fairly secretive so it's hard to know all right let's move on to bear case brad what do you think

you go wrong here yeah uh so again if this is my bear case it's a good sign for the company but But the richest competition in the world is all going after a piece of this massive space, but still going after a piece of this space. So the bear case to me is that they take a large enough chunk to place a lower revenue ceiling on Roblox than I think all of us are currently assuming. And then also, I mean, yes, the lowering take rates from a Google or an Apple will help the margins for sure for Roblox. But could it also erode the fact that they're taking 75% from the developer source?

games that they're building on the roblox platform i think that's a real possibility so um either lower revenue ceiling via just more competition or that competition just eroding take rate which is really really favorable right now i i don't think roblox creates so much value for developers like it literally gives them there's no other place where they could do what what developers do here so i think they really have like whatever take rate they want i mean you obviously don't want to like piss off your own users but it's uh i think it's proportional to how much value they provide um but yeah i guess it's a competitive world is definitely one of the low lights and then um my bear case is

is it really is the age thing. And I know people harp on this. And if you listen to all the conference calls, like this is every analyst seems to be asking questions around age demographics and they have like the 13 and older figure, but I keep asking myself, what would it take for me to get on this platform? And it would take a lot and it would take a huge improvement from where it is today i i just think this fades off other than predators i think this fades off after the age of like 20 um and there has to be sort of a step change in like how lifelike the platform is before i'm back before i'm on there yeah but at the same time for me at the same time it you can't erode the existing experience for younger people yeah i agree that's the biggest conundrum that's my

case as well as they can't age up if they don't age up or sorry if they do age up i mean this is a company that's likely worth hundreds of billions of dollars versus the market cap today or enterprise value today of 35 billion dollars and super cash flow generative so like they can return a ton of cash to shareholders but if they don't i i mean you know maybe this company is worth as much as they are right now but if they're only limited to teenagers and below that you know that's just allowance money like that it's not it's not it's not that lucrative over the long it's two billion in bookings that's i mean a lot of allowably that's not that much but it is i think it's like it's 13 average monthly bookings per dau is i think that's the i think it's a

monthly figure maybe it's a quarterly figure so 13 i mean yeah that's it's not a ton of money the question i think they have to ask is and maybe the developers on roblox have to ask this is how do i convince call of duty players how do i convince fortnite players how do i convince fifa players how do i convince when they fifa can how do i convince gta player red dead redemption players that are 20 to 30 years old how do i get them on here that's a big question yeah um all right more or less interested brad what are your final thoughts for this company more interested for sure um i think this is a lot more interesting than any of the other publicly traded um video video game vendors yeah except for ea ea is just wow what a company but but actually uh

I am more interested in Roblox after listening to this. Me too. I just, I don't know what it is. I don't know what's holding me back. Like I am more interested. It's a wonderful business all around. There's just like a part of me that's reluctant to own it right now. And I really can't put a finger on what that is.

And maybe it's just like. You think it's because you have no interest in the product? Potentially. yeah maybe if i had a kid that was like spending all spending way too much money on it i would understand um but i don't know i don't know what the holdup is uh i guess yeah ryan you do love companies that you uh that you uh use in your day of life um true for sure but i think we do understand that kids love this so i think the holdup is something different i don't know why for me i'm more interested i've loved like since the s1 ryan can attest i've been following this

company, but I don't know why I've just been sitting here sucking my thumb. Like there's something, maybe it's just the age up thing. I'm not confident. I'm more interested. And I think it's possible to climb the wall of worry and age up over the next decade. But I don't know. At the current valuation, it's a bit of a concern for me, but it's one of those, it's on, it's near the top. Okay. Here's, here's a theoretical. Let's say you knew for sure that they weren't going to be able to age up that it's like mainly going to be like 16 year olds and below what cashflow multiple would you be willing to pay for that business? 30. No, no, no. I mean, that's a pretty, that's a large market opportunity. Yeah. But they already have

most of it. At least in Europe. Yeah. I'd say probably like 20 because there is a lot of uncertainty about uh i don't know how lucrative is it right now 16 year olds in india and a lot of people you know uh a lot of kids outside of the u.s and europe don't have the free time you know to spend two hours on on their phones i don't know brad what do you have well well china is i mean they have that restriction now and you know if they're growing a whole bunch in asia pacific there's the china risk um and i can't remember exactly what it is but it's like you only get one hour on the weekends one hour a day on the weekends to play games yeah i don't know it's something for fairly restrictive like that yeah um i know a lot of parents in the u.s would

like to like to have that that ability but yeah it is very punitive if that's the right word brad what are your thoughts what are your thoughts uh nothing to add um in addition what you guys have already said. All right. All right. Well, there's stock for next week. Yeah. Yeah. We're going into my portfolio for next or two weeks from now into the world of American cannabis. And we are going to do green thumb industries. So one of the trades out between the second and third largest player in the industry. One of the strongest balance sheets. I'm extremely biased, so I'll try to not be too much of a cheerleader when we do it. um but yeah looking forward to uh talking through it i'll uh i'll try to be your contra i'm gonna

pick green thumb apart i'm just gonna come up with all the low lights yeah yeah we've uh we've covered we've covered a few well actually the day after this comes out or excuse me the two days after this comes out we're gonna have weed map cfo art and leon and we've that's like an ancillary cannabis company we've also done grow generation which is a retailer that's focused on the hydroponics slash cannabis industry but i think this is the first time we will be doing a pure play um so it'll be interesting very fun um all right that's gonna do it anything else guys nope all right that's gonna do it for this episode uh remember to sign up potential multi beggars can give us a review on spotify or itunes easiest way to help the show and it takes less than five

minutes to do as well. The guy that gave us a bad review on Peloton, maybe that took a little bit more than five seconds, but it's all in good fun. Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients make what securities discuss in this podcast. Thank you all for listening. We'll see you next time. We'll be right back.