According to a book owned by Ms. Goldfinch, he is a Dream-maker, a being that comes to Earth every 1000 years. He starts life as an egg with grayish blue colors, and over time, his egg's colored rings begin to change into bright neon colors. After the change is complete, the egg will not hatch until it is placed in the exact location where it was found, in this case, the barn belonging to Abby and Cody's grandparents.
As a Dream-maker, his purpose is to show the children of the world their dreams more clearly, the first of which is Abby. He also reveals Barney's dream and is supposedly the only one in the movie to witness his dissolving back into his doll form.
While he does not speak any sort of language, he can understand others and can communicate with "ooh's", "aah's", "hmm's", and giggles.