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4 Reasons to Be Excited for the Roblox IPO

By Leo Sun - Feb 4, 2021 at 7:45AM

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The youth-oriented game development platform could just be getting started.

Roblox, the gaming platform and app that lets users play as well as create and share their own games, initially planned to go public via a traditional IPO last December. But it postponed that offering and subsequently announced it would launch a direct listing in February instead.

However, Roblox's direct listing was recently postponed again after the Securities and Exchange Commission raised questions about how it recognizes its revenue from Robux, the platform's virtual currency.

As a result, it's still unclear when Roblox, which was valued at $29.5 billion after its latest funding round, will ever hit the market. But despite those setbacks, I'm still excited about Roblox's market debut, for four simple reasons.

Vehicle Simulator, a game created in Roblox.

Image source: Roblox.

1. A first-mover's advantage in a niche market

Roblox simplifies the development of video games with a drag-and-drop system of interactive blocks. This platform, which runs on the lightweight Lua programming language, is simple enough for children and non-programmers to use.

Children create most of Roblox's games, and they can share their games with other users. This cycle is self-sustaining, and draws even more users to the platform.

Roblox enjoys a first-mover's advantage in this niche market, and it's different from professional game development engines like Unity Software (U -0.79%) and Epic Games' Unreal Engine, which both target professional developers.

2. A young and growing market

In mid-2020, Roblox claimed its platform hosted 150 million monthly active users (MAUs). It didn't update that figure in its prospectus, but it revealed its daily active users (DAUs) rose 47% to 17.6 million in 2019, then grew 82% year over year to 31.1 million in the first nine months of 2020. Its DAUs hit 36.2 million in November.

The total number of hours users spent on Roblox grew 45% to 13.7 billion in 2019, and surged 122% year over year to 22.2 billion in the first nine months of 2020. Its platform also hosted more than 18 million user-created experiences at the end of last September.

Roblox's core demographic is also very young. In the first nine months of 2020, 54% of its users were under the age of 13. As those users mature, they'll likely develop even more complex games.

3. A creator-powered cycle

Roblox is a creator-powered platform, which makes it more similar to Alphabet's (GOOG -1.29%) (GOOGL -1.34%) YouTube than Unity or Unreal.

Cicada Showdown, a game created in Roblox.

Image source: Roblox.

That's why Roblox creators often stream their experiences to YouTube to gain more viewers and players. Roblox's own YouTube channel has 2.8 million subscribers, while its top streamers are extending its reach to millions of additional subscribers.

Roblox's core platform is free to use, but it encourages creators to monetize their content by adding in-game features or creating clothing, accessories, gestures, and emotes for its Avatar Marketplace.

Players make those digital purchases with Robux, a virtual currency that is purchased from Roblox. This cycle can enrich Roblox's top creators and encourage more creators to monetize their games.

4. Robust revenue growth

Roblox's revenue rose 58% to $488.2 million in 2019, then grew another 68% year over year to $588.7 million in the first nine months of 2020. It partly attributed that acceleration to the pandemic, which caused more children to stay at home, play more video games, and spend more time online.

On the bottom line, Roblox's net loss narrowed from $97.2 million in 2018 to $86 million in 2019. But in the first nine months of 2020, its net loss widened year over year from $46.3 million to $203.2 million.

Most of that loss came from a near-threefold jump in its developer exchange fees, or the cash it pays out when developers trade in their Robux for real-world currencies.

Roblox expects those fees to continue rising as its business expands, so investors shouldn't expect it to turn profitable anytime soon. But over the long term, Roblox will likely reduce the real-world value of each Robux (which is currently worth $0.0035) to narrow its losses.

The key takeaways

Roblox could have plenty of room to expand as it tethers more young developers to its creator-friendly ecosystem. Its public debut has hit a lot of speed bumps, but it could be well worth the wait -- provided it doesn't arrive at overheated valuations.

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Stocks Mentioned

Alphabet Inc. Stock Quote
Alphabet Inc.
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Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
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Unity Software Inc. Stock Quote
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U
$41.32 (-0.79%) $0.33

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