Roblox, a gaming and interactive platform built for kids and teenagers, is set to hit the public markets on Wednesday with a direct listing. The company did phenomenally in 2020 with lockdowns and school closures forcing kids to play with their friends digitally instead of in person.
But what about this year and beyond? Before its direct listing on March 10 (similar to an initial public offering, but without raising money), management released user and financial guidance for the 2021 fiscal year. Here's what anyone thinking of investing in Roblox needs to know before shares start trading later this week.
Image source: Getty Images.
Growth will slow. A lot
Looking back at 2020, Roblox saw bookings grow 171% to $1.88 billion, a major acceleration from the 39% growth it had in 2019. Remember that with gaming companies, the non-GAAP bookings metric is typically a better proxy than revenue when evaluating top-line growth. Even though Roblox gets 100% of the cash right away when a user buys Robux (its in-game currency), the company has to defer and then recognize some of the sales in future quarters to keep on the up-and-up with accounting standards. Investors should mostly ignore revenue for a company like Roblox, as bookings and cash flow give a better measure of the underlying financial performance.
As mentioned above, the majority of Roblox's users are under 18. So when in-person activities and schools closed around the world in 2020, millions of kids turned to Roblox to play with their friends and socialize. Daily active users (DAUs) on Roblox grew 85% to 32.6 million last year with total time spent on the platform hitting 30.6 billion hours. While this growth was great for the business, management expects the 2020 lockdown tailwind to turn into a bit of a headwind this year. The recent 2021 guidance calls for bookings growth of 10% in 2021, a major deceleration from 2020. Total hours engaged is actually not expected to grow at all.
If you are thinking of investing in Roblox, this slowdown in growth shouldn't scare you. It was a good business before the pandemic and will still be a good one after it ends. It just got a one-time boost to growth in 2020 that likely won't be repeated.
The future looks bright
In late February, Roblox management hosted a two-hour investor day where team members talked about their vision for the service over the next few years and beyond. In the near term, the platform is getting voice chats, adding another way for users to socialize and chat with each other within the games. From a monetization perspective, the company is working to expand its partnerships/advertisements and host more events like the Lil Nas X virtual concert it had last year.
But the biggest news may have been the discussion around improving avatar and game graphics. With more users under the age of 13 than not, if Roblox is going to continue growing, it will need to expand to older age groups. Over time, if it can give Roblox developers the tools to create the same graphical detail as a game from Activision Blizzard (ATVI) or Take-Two Interactive (TTWO 1.86%), more older users should start to join. Investors should watch for more information regarding graphics improvements and track the growth of older users as signs this strategy is working.
What valuation will Roblox come out at?
It is tough to tell where a company will trade before a direct listing because investment banks do not set an offering price beforehand. However, Roblox did raise money at a $29.5 billion valuation earlier this winter, which should give investors an idea of where shares will trade once the stock goes public. At that market cap, Roblox would trade at 14.3 times its estimated 2021 bookings and about 89 times its estimated 2021 operating cash flow.
This is no doubt expensive. However, with high-growth stocks continuing to sell off, investors who believe in the long-term vision might get a chance to buy Roblox at a discount once shares start trading on Wednesday.
