Sahil Alvi, the founder of Neuron Partners, has voiced his frustration over the lack of returns on his clients' investment in Roblox, spanning over two years. In an open letter addressed to Roblox CEO David Baszucki, Alvi expressed concern about the company's undervalued status and the leadership team's failure to adapt to evolving market dynamics. Despite acknowledging Roblox's potential as a metaverse platform at the intersection of social media, gaming, and commerce, Alvi criticized the management for its inability to capitalize on the platform's enormous potential.
In the letter, Alvi highlighted that while Roblox has achieved praise for its user and revenue growth, especially in foreign markets like Japan, it continues to experience financial losses, with no clear resolution in sight. The company's stock, which peaked at $78 billion in 2021, witnessed a 70% collapse in the first half of 2022, and Alvi believes the leadership team is yet to recognize the changing market conditions.
"2024 is going to be a crucial year where we take a view on whether management is moving the company towards a sustainably profitable business," Alvi emphasized. He cautioned that the loss-making company has only $2.1 billion of net cash left, and the economic challenges anticipated in the coming year could push Roblox into dire financial straits.
Notably, the letter called for an overhaul of Roblox's cost structure, drawing a parallel with Spotify's approach. Alvi argued that such measures are essential to restoring market confidence and trust among investors. He further urged the leadership team to adopt more creativity and drive to harness Roblox's potential fully.
Roblox, launched in 2006, serves as a metaverse platform, providing creators with tools to design their own video games hosted on the platform. Boasting a daily active user base of approximately 70 million, with half of them belonging to Generation Z, Roblox offers a unique space for virtual experiences. Brands, such as H&M, have capitalized on this, setting up virtual stores within the Roblox metaverse.
However, Alvi expressed concerns that Roblox's management is not executing strategies with the necessary urgency. He suggested that the company should strike more partnerships with major brands like Disney and Adidas, emphasizing that having a presence on Roblox should be a necessity for every major consumer brand globally.
Despite the potential, Roblox's stock currently trades at $40, well below Neuron Partners' fair value assessment of $75. Alvi warned that the stock might not recover until investor trust is restored. The letter also criticized Roblox's accounting methods, including its use of covenant-adjusted Ebitda, and raised concerns about safety and potential political messaging risks associated with the platform.
While Alvi sees potential in Roblox, he emphasized that the leadership team needs to act urgently to address these issues. The letter, posted on LinkedIn, concluded by suggesting that the Roblox Board should actively consider involving an activist hedge fund or a tech-centric private equity firm to bring in a fresh perspective and accelerate the company's path to profitability. Alvi plans to monitor Roblox's performance closely in the coming year before deciding on the future of his conviction call.