Tired of waiting for the undervalued asset to finally appreciate, the investment manager and strategic advisor penned an open letter to management to channel his thoughts productively by providing feedback on how cofounder and CEO David Baszucki can restore market confidence.

The metaverse play could certainly benefit from shrewd advice. While its most recent quarter won praise for strong growth in users and revenue, particularly in foreign markets like Japan, it continues to bleed red ink with no clear end in sight.

“We’ve been watching the stock languish for the better part of two years,” Alvi told Fortune by phone from his office in Dublin. “It doesn’t seem the leadership team has gotten the memo that times have changed and markets no longer reward growth for growth’s sake.” 

Alvi, who declined to quantify the size of his firm’s stake, believes Roblox is a diamond in the rough that sits at the intersection of social media, gaming, and commerce.

As such the Neuron Partners founder wants to see more drive and creativity from Baszucki’s leadership team to harness the platform’s enormous potential.

But he’s beginning to lose hope as the loss-making company only has another $2.1 billion of net cash left in the till, and harsher economic headwinds next year could plunge Roblox into dire financial straits.

“2024 is going to be a crucial year where we take a view whether management is moving the company towards a sustainably profitable business,” he said. 

In the letter, which he posted to LinkedIn last week, he warned the $40 stock would not recover to the $75 his firm views as fair value until it regains the trust of investors that it can finally end its streak of losses.

One move Alvi supports? He believes Baszucki ought to take the same approach as his Spotify peer Daniel Ek and overhaul its cost structure.

For brands, unparalleled access to Gen Z

Launched in 2006, Roblox provides creators with a digital toolkit to design their own video games like Blade Ball. These are then hosted on the company’s platform, where they compete for the time and attention of users. 

Both parties then get a cut of the money spent by the roughly 70 million-strong daily active user base—and there’s enough for the top 1,000 content creators on Roblox to make a living off their work.  

Think of Roblox like a YouTube for the metaverse with particularly strong exposure to coveted younger demographics, who frequent the platform in droves and jump from one game to the next. Half of its frequent users—34 million—are Gen Z.

Gamers have held virtual pro-Palestine protests on Roblox, where thousands of users have attended the online rallies👇 pic.twitter.com/2nzZ6UXSYX

— Al Jazeera English (@AJEnglish) October 28, 2023

“It’s difficult to see how levels could get notably higher, with kids spending 180 minutes—3 hours—on the programming game daily,” estimated parental control app provider Qustodio, adding that 59% of smartphone-equipped children use the platform daily.

While they move around Roblox, they have the opportunity to visit virtual branded experience hubs like H&M’s Loooptopia. According to chief partnerships officer Christina Wootton, Gen Z spends on average 11 minutes visiting such virtual stores. 

“This is unheard of—typically they spend seconds on other platforms,” she said during the group’s investor day last month. The longer the engagement, the greater the likelihood vendors can convert consumer interest to money.

Pandemic-era darling comes crashing back to earth

That’s one of the reasons Alvi sees such potential in the platform, but he feels management is not executing with the necessary urgency and should be striking more partnerships with the likes of Disney and Adidas. “Having a presence on Roblox should be a necessity for every major consumer brand in the world,” he said. 

After a bumper year during the 2020 pandemic lockdowns, when it ran neck and neck with Fortnite to be the most popular app by time spent, the company took advantage of the growth to go public in early 2021. 

When Mark Zuckerberg changed Facebook’s name to Meta in October 2021, arguably the biggest beneficiary of the heightened interest in digital worlds were Roblox shareholders. The value of the stock nearly doubled in mere weeks, peaking in November at $78 billion.  

But like many COVID-era investor darlings, it came crashing back to earth soon after. In the first half of 2022 shares in Roblox collapsed by 70% and have traded sideways ever since. 

In addition to the constant losses that irk investors, Roblox relies on some creative accounting methods as well to flatter financials.

‘Net losses for the foreseeable future’

Roblox uses a peculiar form of underlying earnings called covenant-adjusted Ebitda, claiming this is the metric creditors of a $1 billion loan want most to see improve to ensure their money is returned with interest.

Yup, it’s happening.

Survive and thrive in #LEGOFortnite, arriving in Fortnite on December 7, 2023. pic.twitter.com/VQmeWqIRAw

— LEGO Fortnite (@LEGOFortnite) December 4, 2023

Once all these accounting adjustments are made, its $279 million Q3 net loss under GAAP suddenly turns into an $81 million profit. A big factor in this equation is stock-based compensation, which alone pushed them deep into the red. 

“We expect to continue to report net losses for the foreseeable future,” it told investors in its latest quarterly results, blaming the “high levels of expense required to support the growth of the business,” such as costs related to infrastructure as well as trust and safety.

In a statement to Fortune, the company argues P&L elements that drive GAAP net losses, like stock-based compensation, are not reflective of the full story in its estimation, in part because they are often accounting losses on paper. Investors are better served focusing on its cash flow, it claims.

Moreover, it forecasts its capital needs going forward will now moderate following the completion of an expansion of its Virginia data center. As a result, it posted a positive free cash flow of $59 million in the third quarter and predicts it will continue to generate excess cash after investments both in 2024 as well as the current fourth quarter.

Stripping out noncash effects like stock-based compensation may give a more accurate glimpse of underlying trends, but it is not without its critics. Berkshire Hathaway vice-chairman Charlie Munger famously suggested investors replace the term Ebitda with “bulls–t earnings” every time they hear it.

Lego and Fortnite teaming up

There are also unique risks peculiar to Roblox that investors must consider. 

Since such a large number of its users are minors, Roblox spends heavily on safety to ensure their data remains safe from bad actors who could identify them as easy prey for scams.

There is also the ever-present risk that pedophiles are lurking behind friendly looking digital avatars.

Roblox uses a combination of chat filters as well as parental controls to limit interaction. This helps explain why investments in online safety tools represent a chunk of its costs.

Then there’s the risk of unwanted political messaging that might scare users, parents, and advertisers away, much as we’ve seen with X recently.

Last month, Malaysian youth used Roblox to organize a digital demonstration to support Palestinians—a sensitive issue where the smallest bad apple can potentially ruin the barrel and spark damaging headlines.

Finally, competition is coming in the form of a metaverse partnership between Lego and Fortnite, the only two brands that realistically could poach away Roblox’s largely young audience.

A survival-style crafting game, the first product from the long-term partnership the two brands struck last year, just went live this month.

To fend off the threat, Roblox recently expanded to include compatibility with Sony PlayStation and the Meta Quest VR headset so their games reach a broader audience.

For creators and advertisers, the 17 million new combined downloads across the two platforms offer more opportunities to meet tween users where they are most likely to be found, spending time in virtual environments with their friends.

For now, Alvi plans to wait and see whether Baszucki can end the stream of red ink, but he expects to decide next year whether to pull the plug on his conviction call. 

“Right now those issues are fixable, but as time goes on the leadership team will eventually paint themselves into a corner,” he said.