Krapdivad

Just finished watching Mohnish’s latest talk at Peking university. He went further into what he calls “spawners.” He classified FB as having an “embryonic spawner DNA” which means FB has shown the ability to acquire a company and grow it. More important than the batting average of these acquisitions was the continual frequency of these bets that sometimes leads to the big winners (I.e. Instagram). FB has shown that they have the ability to continually invest in businesses outside of the core Facebook which keeps the company flexible and young throughout the future.

One thing that's stuck in my head about FB is how it's a great cloner. Mohnish Pabrai had a talk at Boston College how the market doesn't recognize the power of great business cloners. He mentioned Microsoft, Walmart, and Costco as some examples of businesses that were able to find what works and copy their competitors. Facebook has already shown it can clone the success of their peers: - FB Marketplace (Craigslist) - Stories/ face filters (Snapchat) - Messenger/Whatsapp (iMessage) - Portal (Facetime) They've been working on spreading into adjacent industries and had mixed results: - Virtual Metaverse with Occulus (Roblox/Apple Glasses) - Dating (Tinder/Bumble/Match.com) - Gaming (Twitch/Apple/Stadia/etc) - Facebook Watch (Apple Watch) - Crypto (Bitcoin) - Etc Facebook has shown how good they are at adapting to new circumstances (transition into mobile, increasing security over user data, and ability to block fraudulent accounts/violent videos/inaccurate information). Facebook's ability to constantly adapt, and clone the success of their rivals, with a passionate founder CEO gives it a competitive advantage and long runway in my opinion. The biggest risks facing FB is increasing competition, anti-trust, regulatory, and tax issues which will require constant resources and attention. This is compounded by the number of different countries, states, and cities that they need to deal with. Facebook also gained a bad reputation for being untrustworthy and for their neutral stance on preventing hate speech. However, history has shown that users and advertisers continue to return to its platforms even though they may "hate" the product. This highlight's the power of Facebook's switching moat. Looking at it's price now, it looks like a good buy at $250-$260 based on an 18% growth rate. In terms of FB being a potential multi bagger over the years, it has its already large market cap. It doesn't also doesn't have a fanatical user base like Tesla, Apple, or Bitcoin to provide multiple expansion. However, I believe it does have a large part to play in the increasingly digital social world.

https://www.ft.com/content/46d4727c-761d-43ee-8084-ee46edba491a FT had an article today about increasing pressure on reducing CO2 emissions from steel making. They featured a new technology that uses hydrogen to create steel, and will require the intermediate "sponge iron" to be heated up with an electric arc furnace. I see it as a tailwind for EAF which produces much less CO2 than traditional methods, and it looks like it will be compatible with future advances in steelmaking.

Came across an interesting blog article that describes Apple’s App Store effect on Roblox margins and the hole it puts Roblox in. Is the solution to just invest in Apple?! https://www.matthewball.vc/all/applemetaverse “Consider the illustrative $100 in iOS Roblox revenue (an estimated 75-80% of all revenues). $30 goes to Apple off the top, while $31 is consumed by Roblox’s core infrastructure and safety costs, and another $11 is taken up by overhead. This leaves a total of $28 in pre-tax gross margin dollars for Roblox to reinvest in its platform. This reinvestment spans three categories: research and development (which makes the platform better for users and developers), user acquisition (which grows network effects, value for the individual player, and revenues for developers), and developer payments (which leads to the creation of better games on Roblox). Today, Roblox reinvests 23% of revenues in R&D, 7% on sales and marketing, and the aforementioned 24.5% on developer payments. As a result, it currently operates at a roughly -25% margin. Roblox has doubtlessly enriched the digital world and led to hundreds of thousands of new digital creators. But for every $100 it creates, it loses $25, developers collect $24.5 in net revenue (i.e. before all of their development costs), and Apple collects roughly $30 in pure profits despite putting nothing at risk. The only way for Roblox to increase developer revenues today is to deepen its losses or halt its R&D, which would in turn harm both Roblox and its developers over the long-term. Roblox’s economics should improve with scale. Overhead, sales and marketing should grow more slowly than revenues. However, this would unlock only a few percentage points to cover significant losses or marginally increase developer revenue shares. R&D should offer some scale-related margin improvements, too, but fast-growing companies shouldn’t be achieving profitability through R&D operating leverage. The company’s two largest costs, which comprise roughly 61% of revenues, are essentially fixed. Infrastructure, which largely scales with usage and will become more expensive as the platforms expands its concurrency capacity and expands into VR. And Roblox doesn’t control store fees; that’s exclusively up to the platform. In effect, the only way a Roblox developer could collect a substantially greater share of their game revenues would be if (1) Apple built its own Roblox-like platform; (2) all eligible users had and only wanted to use their iOS devices to play Appleblox; and (3) Apple operated Appleblox at break-even (which the App Store was intended to do but doesn’t) or didn’t pay fees to the Apple App Store (which all Apple services do).”

Excellent points. Looks like Roblox will have a difficult time capturing the 12+ year old market. They’re hoping that as kids age, the users will begin to develop more sophisticated games. 35% growth is indeed very aggressive. Facebook was able to grow its revenues by 37% the last 5 years, but Roblox doesn’t have the same demographics. Seems like MySpace failed because they were too focused on marketing and advertising and let the technical side of the business lag behind the competition. It looks like at Roblox, they have the opposite stance, with very little towards marketing and with most of the employees being engineers. How would you value the company? Is this something that would go in your “too hard pile”? I thought the free cash flow metric would be useful in calculating a potential valuation. I do know that roblox’s revenues are a lagging indicator because they way they amortize the bookings over 2 years. So the free cash flow may even be a conservative amount.

That's true, the pandemic was definitely a tailwind for the company. I'm looking at the company though the long term lens that Mohnish recently gathered from Nick Sleep's investing letters. If you're able to identify a company that can compound with a long and wide runway, valuation almost takes a back seat. I think Roblox has been one of the first to figure out this emerging market space of 3D virtual "metaverse" experience which has been made possible by improving technology. They've created a sustainable engine of content creation whose magnitude can grow considerably larger than it is now. I agree that short term bad news on falling engagement numbers will hurt the stock price. However, I'm also thinking it's quite rare to find a company that contains this perpetual growth engine powered by its own users. Appreciate the feedback, and looking forward to thinking about this some more.

Thanks for your insight, I agree that it's hard to predict if Roblox will become a "fade-defying" business in this fast changing industry. I think what's special about the Roblox game engine is that all the content is user generated and constantly being updated. Therefore, Roblox isn't a static game, but constantly evolving with new games and experiences that users can choose from. This gives it some defense against users becoming bored with it and moving onto a different platform. It's similar to Youtube where Google just focuses on improving the engineering behind the platform while the users provide the ever expanding and changing content. This new content then attracts new users and new content creators.

Taking a look at this company before its direct listing. Not really my typical investment, but more of a bet on the opportunity to own a potential compounder with a passionate founder, in a niche market with a long runway for global expansion, producing positive free cash flow, and a flywheel for strengthening its network moat. Betting on the Jockey: Passionate and long-term focused founder CEO: Roblox was an idea that was formed by its founders after their initial physics simulation software in 1989 and has been their main focus ever since 2004 with the creation of Roblox. The remaining founder David Baszucki has been singularly focused on creating a shared 3D virtual space aka Metaverse to bring people together by doing things together online. Baszucki owns 12% of Roblox and 70% of the voting power (strongly aligned with the success of the company). 
If David Baszucki left for any reason or died, it would be a huge hit to the company. Network Effect of Users and Flywheel of User Developed Content Roblox is able to compete against other companies because of their network effect. They have captured the majority of the 12 and under group and so it’s harder for users to switch to another platform when all their friends are already on Roblox. Roblox doesn’t need to create any content themselves. They have a self generating content engine powered by their users. These developers and creators can be paid well and are incentivized by Roblox’s large user base, which further incentivizes more users to join the platform. The effectiveness of this flywheel is apparent in Roblox’s growth numbers, which have been increasing exponentially. Currently 31 M daily active users over 180 countries. DAU’s have been increasing 50-80% Hours engaged have been increasing 50-120% (2.6 hours a day - the most among any social app) Bookings growing from 40-170% Robux is the revenue generator of this ecosystem where it’s purchased by the users who want to personalize their avatars and pay for experiences, and in turn is used to pay the developers. This model has proven to produce free cash flow for the company and high growth margins. Roblox is focused on expanding this ecosystem globally, and into a wider variety of experiences (i.e. concerts) which gives it a large runway to expand into adjacent markets. They’re currently focused on growth mode, and are paying the game developers very well. There are about 2 trillion people under the age of 15 in the world (so 31 M current users is a drop in the bucket). Risk of Future Competition Roblox has only a segment of the demographic for online gameplay. In addition to all the other online video game makers and competitors where users can spend their time, Facebook has been way ahead of Roblox in terms of developing the hardware (VR) for the future of immersive online experiences. Facebook also has a much larger demographic and more experience with tailoring content to individual users. Facebook has recently been putting a lot of money and effort into blocking harmful content for their users. This is in direct competition with Roblox’s focus on safety and civility. There is a risk that Roblox users will switch over to Facebook if Facebook creates a similar ecosystem with their already massive user base. Roblox is operating in a very fast changing industry, and there is risk that either competition or regulation can slow down their growth rate. Roblox could turn out like MySpace where it enjoyed a network effect but lost the competitive advantage once Facebook proved to be a superior platform and it didn’t adapt fast enough. 
Roblox is paying 30% of their revenue’s to Apple & Google for their app stores. If apple decides to change or add more privacy and data collection requirements to Roblox’s business, it would hurt the business. 70% of users come from Apple’s App Store or Google Play store Risk of Loss of Users and Regulation Since the majority of Roblox’s user base are children, a hack into Roblox to compromise the safety and civility aspects of the company would be devastating to the company. Parents would pull their kids off Roblox if there was any hint of it being unsafe for children. Perhaps even a widely spread false rumor could trigger a mass exodus from the platform or heavy governmental scrutiny. Future governmental regulation may be imposed onto Roblox because of too much screen time, or safety concerns and would slow Roblox’s growth. 
Covid was a tailwind to Roblox’s growth and this may not be sustainable. Any lapse in services could also detract users into joining a different platform. Robux are purchased regularly by a very small percentage of the total users. If this group were to stop purchasing Robux, it would be very harmful to the company. Valuation ($30B) No matter how great the company, we can’t pay an infinite price for it, as Munger says. The company was valued at $4B last year and is now valued at $30B, indicating people are pricing a very optimistic future. Private investors have already seen a huge increase in their ownership and can sell immediately once Roblox goes public. However, the stock may become even more popular after if debuts on the public market. As a fast grower, Roblox will have negative earnings for quite some time because they’re spending to gain marketshare. However, they do generate positive free cash flow of about $390M / year ($292M for last 9 months *4/3). At a 35% growth rate, you could expect to get back your money in 16 years. Ideally I would wait for the valuation to fall to $15B to buy with a 50% margin of safety. However, with a company growing this fast and the popularity of IPO’s that opportunity may not come. It may be worth getting a position in the company just to take a ride on their upward growth trajectory. Downside: If users were to mass migrate to another platform due to a hack, or a competitor’s superior immersive experience from a more experienced and well capitalized competitor (Facebook, Apple, Google, Amazon) it would spell the destruction of Roblox in this winner take all situation. Paying up to buy Roblox at a very high valuations means that the company has to execute perfectly on its growth strategy. Any misstep or threat of regulation and the share price may crash. Summary I’d be willing to place a small bet (3-5% of my portfolio) on Roblox based on it’s excellent management (a passionate, visionary, Founder-led CEO with a large stake in the company and long term outlook), it’s flywheel growth engine (game developers are attracted to create on the platform because of the strong user base, which attracts more users to the platform), and its potential to spread into adjacent fields of virtual entertainment and advertising (virtual concerts and events). Roblox has an economy where users pay for all the generated content using Robux and the game developers are incentivized to produce the best content and paid in Robux. This kind of business engine allows the company to focus on their improving their tech and engineering (79% of employees are engineers) and allows it to be profitable enough to generate positive free cash flow. The company has a long runway since it can expand globally. Additionally, it seems like WSB on Reddit is positive on this company, which can turn it into a “meme stock” and make it take off. 
The downside is that the stock is currently priced for perfection so buying at the public price will leave it vulnerable to any bad news I.e. Low guidance in their metrics (DAUs or bookings), a hacking event, or hints of regulation, early private investors deciding to sell out to secure their gains, can all cause the stock to crash.

Some hedge fonds need to liquidate their short positions due to GME rising so high. I agree with the high short interest. Could also be related to the pop in AMC since they're one of SRG's tenants.

Ray Dalio taking a deep dive into Bitcoin. His conclusion: Bitcoin looks like a long-duration option on a highly unknown future that I could put an amount of money in that I wouldn’t mind losing about 80% of. Aka he’s willing to place a bet on it https://www.bridgewater.com/research-and-insights/ray-dalio-what-i-think-of-bitcoin