What a difference a pandemic makes.

As recently as February, Roblox closed a round of venture capital funding that valued the online videogame hub at just $4 billion. But after nine months of lockdown, with tens of millions of Americans working from home and millions of kids "e-learning" for maybe a few hours a day -- leaving even more time to play -- Roblox looks likely to have doubled in value to $8 billion.

And now it's time to cash in -- and IPO.

Group of fantastical avatars over company name ROBLOX.

Image source: Roblox.

What's "Roblox"? Ask your kid

If you haven't heard of Roblox, your children will probably be your best resource to explain "what it is." In the meantime, though, think of it as more of a platform on which to chat with friends and play games (much like Amazon.com (NASDAQ:AMZN) is a platform to buy things). Popular games that kids play on Roblox include such titles as Natural Disaster Survival (where one attempts to, er, survive natural disasters), Hide and Seek Extreme (self-explanatory), and Adopt Me! 

That's the one my kid plays, by the way. Hours and hours a day, adopting, training, and raising exotic pets ranging from dogs to monkeys to unicorns, and then trading them to other players for even more exotic finds. But there are many, many more games than just these few examples, and the offerings are growing all the time as Roblox enables developers to create new games and offer them for play on its site.

Simple as the concepts may seem, these games are extremely popular with kids -- a veritable cultural phenomenon. Roblox advertises that the "majority of our users are under the age of 13" and, according to CNN, "about 75% of American children ages 9 through 12 play Roblox regularly with friends." 

The business

If you think that sounds like a good business to be in, you're not wrong. According to Roblox's S-1 filing with the SEC, just released, the company averages 31.1 million daily average users (DAUs), generating $589 million in revenue in the first nine months of 2020. (Games are free to play, but players can elect to purchase in-game currency called "Robux" to spend on in-game improvements such as special items and avatar costumes -- that's where Roblox's revenue come from.) 

Prior to COVID-19, Roblox was growing strongly -- DAUs were up 47% in 2019 and revenue was up 56% -- and growth accelerated as more people stayed home during the pandemic. Year-to-date, DAUs have grown 82%, and revenue is up 68%. From one perspective, however, this rapid growth during the pandemic has come at a cost. With more new users playing Roblox for free these days, or at least spending less on Robux, losses mounted to $203 million in the year's first nine months. That's the bad news.

The good news is that free cash flow generation at the company belies this seeming "unprofitability." According to data from S&P Global Market Intelligence, actual cash profits have surged several times in value this year, hitting $293 million year to date.

Or put another way: Revenue year-to-date is $589 million. Free cash flow is $293 million. So for every dollar of revenue Roblox takes in, it creates $0.50 in cold hard cash.

Should you buy some Roblox shares for Christmas?

These are astounding numbers. To put them in context, Amazon.com generates just $0.07 in free cash flow per dollar of revenue. Google parent Alphabet (NASDAQ:GOOG) can squeeze 20 cents of FCF out of a dollar of revenue. Even Microsoft (NASDAQ:MSFT), which owns Roblox archrival Minecraft, generated only $0.33 in FCF per revenue dollar.

And yet, even if Roblox is more profitable than any of these other tech companies, it does not necessarily mean that you should buy the Roblox IPO.

Why not? Because even a fantastic stock can cost too much, and when you consider that Alphabet and Microsoft both cost 34 times earnings, while Amazon costs more than 90x, I think there's a very real risk that Roblox is going to come out of the box at a fantastically high valuation.

Precisely how expensive Roblox will end up being is unclear. The S-1 filing it gave us last week was long on words but short on numbers when it came to (a) how many shares it intends to sell at its IPO, (b) what price it wants per share, (c) how many shares it will end up with after the IPO, and, accordingly, (d) the price of the entire company.

Until we know (d), we don't know what number we will be dividing Roblox's sales, its earnings, or its free cash flow into to arrive at a valuation multiple. Until we know (a), (b), (c), and (d), it's too early to say whether Roblox stock is a "buy" -- no matter how great a business Roblox might be.