The company behind the popular Roblox video game platform is planning to go public soon. Originally scheduled for the holidays, the initial public offering (IPO) should now hit the stock market in early 2021 with a market value of roughly $8 billion.
When I say "roughly," I'm probably underestimating the final tally. Roblox delayed its filing in order to fine-tune the asking price upward in light of explosive December IPOs by delivery service DoorDash (DASH -2.74%) and lodging rental specialist Airbnb (ABNB 0.76%).
So Roblox should hit Wall Street running, but will it be a good buy right away?
What Roblox does
Roblox, the company, owns and operates Roblox, the video game platform. Anybody can build games with the Roblox system, where the games themselves are free to play, but many designers are charging fees for in-game items, features, and other assets. These fees are paid in the form of Robux, an in-game currency that can be converted back into real-world dollars. The company generates its revenue from the direct sale of Robux to users. Successful developers can earn serious money by cashing in their virtual boatloads of incoming Robux.
The company doesn't recognize Robux sales as revenue until the in-game buyer either spends it or converts it into actual cash. Therefore, Roblox recognizes Robux sales over the average lifetime of paying users, which currently works out to roughly 23 months.
The company collected $589 million of fully recognized revenue in the first nine months of 2020, a 68% increase from the same period in 2019. At the same time, order bookings that account for the current flow of Robux purchases jumped 171% to $1.24 billion. In other words, Roblox can count on massive revenue growth over the next couple of years as this year's Robux orders work their way through the revenue recognition period.
Buy now or wait awhile?
There's a lot to like about Roblox. User engagement and Robux orders are growing at breakneck speed. The company is experiencing heavy bottom-line losses due to the delayed revenue recognition, but free cash flow clocked in at $293 million across the first three quarters of 2020.
This combination of strong cash profits and much lower taxable income is a highly effective tax strategy. Low or negative earnings can be a problem. When paired with great cash profits, they can also be a sign of a financial management team that knows how to take every tax deduction in the book. Roblox's delayed revenue recognition is a great example of that.
On the downside, the short life span of the average paying Roblox user concerns me somewhat. Fellow digital entertainment expert Netflix (NFLX -0.35%) consistently sees monthly churn rates of roughly 3%, which works out to an average life span per paying customer of 38 months. That's a significant advantage over Roblox's 23-month lifetime per paying customer, not to mention the fact that Netflix charges reliably predictable subscription fees, while Roblox depends nearly exclusively on spur-of-the-moment Robux buys.
Furthermore, there's no telling exactly how expensive Roblox stock will be by the end of the first trading day. We don't even have a firm IPO date yet, nor a final asking price for the new stock.
All things considered, I can see why many investors are excited about Roblox's upcoming IPO, but I'm not lining up at the buying window quite yet. In fact, I won't seriously consider this stock until the red-hot launch has cooled down a bit. To see what I mean, consider the example set by DoorDash. The stock hit the market at $102 per share, soared to $190 on the first day, and trades at a much calmer $158. I don't want to ride that kind of roller coaster with Roblox.