This analysis was first published in SvD Näringsliv, in Swedish, on May 12th, 2024. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Despite Roblox’s enormous success with its players, its journey on the stock market has been tough. The share has fallen 55 percent since its IPO in March 2021. If it cannot get profitability under control, the risk of game over increases.

Plain speaking is rarely a tech CEO’s strong suit. “We are play architects,” explains David Baszucki, CEO and co-founder of gaming company Roblox. The company’s vision is so vague it barely translates: “Reimagining the way people come together.”

The most interesting question is why it is so difficult for Roblox to describe what it actually does — which is games for children. We will come back to that shortly.

CEO David Baszucki has had a tough week. On Thursday, Roblox reported its quarterly figures and they were not well received. The reaction can be traced to a single sentence he mentioned during the investor call: “We will lower our 2024 estimate somewhat.” That line — a hint that the company will not meet its financial targets this year — sent the share dropping like a stone. More than a fifth of Roblox’s market capitalisation vanished the moment the New York Stock Exchange opened.

In total, Roblox has fallen more than 55 percent since its IPO in March 2021. But it is worth remembering that this relatively obscure company is still very large. Even after Thursday’s heavy fall, it is only marginally smaller than H&M by market capitalisation.

The first reason Baszucki is reluctant to call the company a gaming company is simple: that category tends to be very profitable. Roblox lost around 3 billion kronor — just in the first quarter of this year. It is easier to talk about “social meeting places” and the now somewhat forgotten concept of “the metaverse” to justify Roblox’s cost structure and investment levels. There is something to it — in Roblox, players move across many different games and activities with the same character, and it becomes a way of socialising. Mark Zuckerberg at Meta, who renamed the entire company to signal this new direction, is investing hundreds of billions of kronor in the metaverse. By comparison, Roblox’s losses are quite modest. But Meta has something Roblox does not: a highly profitable core business to cover those losses.

The second problem is that Roblox is a platform company. It does not build the games and experiences itself — it lets other developers build on its infrastructure. Generally, this is a very good and profitable model. Compare it with Apple and Google, whose app stores are also platforms that others develop for. But in Roblox’s case, it is a structural problem. For all mobile users, Roblox sits on top of another platform — specifically Apple’s and Google’s. This is where the margins disappear. Mobile phones and tablets are common when children play Roblox, meaning revenues coming through those devices must be shared with the app store. Roblox immediately loses between 15 and 30 percent of revenues there. After that, it must pay the game developers — another roughly 30 percent of what is left. What remains must cover infrastructure costs, security, salaries, and everything else that comes with running a modern tech company. It is easy to understand why the economics are hard to make work.

The third and final problem is growth. As a platform, Roblox must keep two parties satisfied simultaneously — players and game makers. The latter are primarily after revenue, which they receive relatively little of for the reasons above. As long as the player base keeps growing, game developers can perhaps justify their investment even when the economics are weaker than on other platforms. But if players get bored and move on, growth would stop quickly — and developer appetite would shrink immediately. It is a delicate balance that Baszucki must maintain.

Although Roblox is good at selling virtual goods, the majority of its players never pay for anything — as is the case with virtually all mobile games. Roblox is therefore investing in an expanded advertising system to generate revenues from that segment too. Last week, it gave all advertisers access to video ads on the platform for the first time.

Roblox’s challenge is to catch up with itself. The identity crisis its CEO expresses is really about the stock market’s expectations of what a gaming company should deliver — not what Roblox thinks of itself. The company was founded back in 2004 and has had plenty of time to calibrate its offering. But on the stock exchange, it is still a newcomer — and it has had a difficult time.

If it cannot get profitability under control, the risk of game over increases — even if it remains children’s favourite.