November has seen an abundance of well-known tech companies like Affirm, Airbnb, and DoorDash file to go public. However, the IPO investors should be most excited about is Roblox. The gaming platform for individual creators has a long runway for growth and looks similar to YouTube a decade ago. Here's what investors need to know about the company.
Roblox is the gaming version of YouTube
Google's (NASDAQ:GOOGL) YouTube is the No. 1 platform for individual video creators. Its billion-plus users, easy publishing tools, and social features make it the best place for creators to monetize content. With $15 billion in sales in 2019 and a rumored $200 billion market value (investors don't know the exact number since it is a subsidiary of Google), this model has worked quite well for the company.
Roblox has a similar strategy, except with gaming instead of video. It describes itself as a "global platform where millions of people gather together every day to imagine, create, and share experiences with each other in immersive, user-generated 3D worlds." In layman's terms, Roblox users build games that other Roblox users can play.
The company makes money by selling its virtual currency called "Robux" to users. Users can then spend Robux on experiences and features built by the developer community, which then can be exchanged for real-world currency. It also offers Roblox Premium, a subscription service where users can get Robux at a discount to the company's internal exchange rate.
But how are the financials?
Through the first nine months of 2020, Roblox posted $589 million in sales and a $206 million net loss. However, that loss is a bit misleading. Net bookings, defined as sales before any non-cash adjustments, were $1.24 billion in the same period, up 171% from 2019. Why such a large discrepancy between bookings and sales? Because when Roblox sells users Robux, it can't recognize that as revenue until the users spend those Robux on something. This makes it seem like the company is losing a ton of money, when in fact it has generated $292.6 million in free cash flow so far this year.
How Roblox grows from here
Roblox is currently focused on building a platform for kids. Some 54% of its 31.1 million daily active users (DAUs) over the last nine months were under the age of 13. This may concern investors, because young kids are usually not high-paying users. However, Roblox's 17-24 age group, while only 16% of overall users, is growing faster than its core under-13 demographic. Eventually, Roblox wants to enable content development for older age groups, stating in its S-1 that it is working to host experiences for gamers of all types.
Another concern among investors is that Roblox is getting a temporary "COVID bump" that is not indicative of its long-term growth. While it is true the pandemic accelerated bookings growth to 171% in 2020, the company was still growing at a healthy 39% rate in 2019. Even if growth reverts back to mid-double-digits in 2021 or 2022, that seems like nothing any potential shareholder would need to worry about.
Investors should expect bookings growth to remain strong, given the size and growth of the overall gaming industry. Estimates peg the market size at around $150 billion and on pace to grow around 12%-13% over the next decade. Given this long runway and the fact Roblox is already cash-flow positive, investors should keep a keen eye on this company as it nears the public markets.