Roblox, which owns a popular online platform for creating and sharing video games, is scheduled to go public via a direct listing on the NYSE under the ticker "RBLX" on March 10.
Roblox initially planned to launch its IPO last December but delayed its debut due to concerns about its pricing. In January it decided to aim for a direct listing instead, which lets its insiders sell their existing shares to investors without selling new shares like a traditional IPO.
However, Roblox's debut was postponed again in February after the Securities and Exchange Commission asked it to revise the way it recognizes revenue from its virtual currency, Robux. Roblox says it has addressed the SEC's issues, and recently released its updated full-year results in a fresh S-1 filing. After reviewing the new numbers, I'm still excited about buying Roblox later this month, for five reasons.
Image source: Roblox.
1. Roblox has a sticky and self-sufficient ecosystem
Roblox provides its users a simple, block-based system to create video games without any coding experience. They can share their games with other users and monetize them by charging Robux for additional in-game features. They can also create and sell virtual clothing, accessories, gestures, and emotes on Roblox's Avatar Marketplace.
The platform is easy enough for children to use, and 54% of Roblox's daily active users (DAUs) are under the age of 13. Its total DAUs rose 47% to 17.6 million in 2019 and jumped 85% to 32.6 million in 2020.
Roblox attributes that acceleration to the pandemic, which caused more people to engage in stay-at-home activities like video games, but its platform is also a self-sufficient, creator-fueled ecosystem.
That virtuous cycle makes Roblox more similar to Alphabet's (GOOG 0.74%) (GOOGL 0.55%) YouTube, which relies heavily on independent content creators, than high-end video game engines like Unity Software (U 2.04%) and Epic Games' Unreal Engine, which target professional developers. That's why it isn't surprising that many Roblox creators stream their games on YouTube to attract more players.
Image source: Roblox.
2. Roblox has no meaningful competitors in its high-growth niche
Roblox enjoys a first-mover's advantage in its niche market. Other companies have launched similar platforms since its debut, but none of them have gained much ground against Roblox.
Roblox's lack of direct competitors arguably makes it a more attractive investment than Unity, which competes against Epic's Unreal Engine, first-party engines from game publishers, and other development platforms.
3. Roblox has robust growth rates
Roblox's revenue rose 56% to $508.4 million in 2019, then grew another 82% to $923.9 million in 2020. It mainly generates revenue by retaining a cut of each Robux-based transaction and selling premium monthly subscription plans that provide discounted Robux, virtual items, and various other perks.
Roblox's total bookings, which include its deferred revenue from virtual currency sales, rose 39% to $694.3 million in 2019 and soared another 171% to $1.88 billion in 2020. Its average bookings per DAU dipped in 2019, but rebounded strongly in 2020 as its number of engagement hours soared:
|
Metric |
2018 |
2019 |
2020 |
|---|---|---|---|
|
Average Bookings per DAU |
$41.53 |
$39.40 |
$57.77 |
|
Total Hours Engaged |
9.43 million |
13.7 million |
30.6 million |
Data source: Roblox S-1 filing.
4. Roblox has a viable path toward narrower losses
Roblox's growth is impressive, but it's still deeply unprofitable. Its net loss narrowed from $88.1 million in 2018 to $71 million in 2019, but more than tripled to $253.3 million in 2020.
Roblox incurred higher expenses as more of its developers traded their Robux for U.S. dollars, and it also accelerated its infrastructure, R&D, and sales and marketing investments.
Roblox currently sells each Robux at an average price of $0.01, but developers can convert each Robux back to U.S. dollars at an exchange rate of $0.0035. The cash Roblox pays out for those conversions ("developer exchange fees") nearly tripled to $328.7 million -- or 36% of its revenue -- in 2020.
If Roblox either increases the cost of each Robux or reduces their conversion rate to U.S. dollars, those fees would decline, and its profitability could improve. That process needs to be gradual, otherwise it could alienate existing users, but it could leverage those price hikes to promote its subscription tier.
5. A direct listing suggests Roblox isn't starved for cash
Lastly, I like Roblox because it's a direct listing. That process is fairer to retail investors than traditional IPOs, which are mainly available to institutional investors before hitting the market at inflated prices.
Roblox's decision to opt for a direct listing also indicates it isn't starved for cash. Its cash and equivalents grew 32% to $301.5 million in 2019, then surged 197% to $893.9 million in 2020 after it secured its latest round of private funding, which valued the company at $29.5 billion.
That valuation is a bit frothy at over 30 times trailing sales, but that price-to-sales ratio could decline significantly if Roblox continues growing. I'm not saying I'll buy Roblox on the first day, but it's still my top stock to watch and consider buying later this month.
