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The Roblox IPO Is Coming March 10. Here Are 2 Things Investors Should Know

By Lawrence Nga - Mar 8, 2021 at 11:59AM

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Roblox stock is well-positioned to grow over the next few years.

Roblox was supposed to go public in 2020. Then the explosive trading debuts of Airbnb and Doordash forced it to rethink those plans.

If Roblox had proceeded with its original IPO plan, it could have left serious money on the table, just like Airbnb and Doordash did. And since the main point of an IPO is to raise capital -- not help institutional investors make a quick buck -- there might be a better way to do it.

And there is.

Going public via a direct listing

After postponing the IPO, Roblox raised $520 million from investors in a private funding round. The deal gave Roblox a $29.5 billion valuation -- up sevenfold from a year ago.

Man playing using VR headset.

Image source: Getty Images.

Next, Roblox announced its plan to go public via a direct listing. This route could further save Roblox money on underwriters' fees while still taking the company public.

Roblox will finally make its market debut on March 10, trading under the ticker RBLX. But before rushing in to buy the stock, here are two things you should know.

Roblox's money-making machine

CEO David Baszucki and Erik Cassel founded Roblox in 2004 with a vision of connecting people through immersive virtual worlds. On Roblox, users create games and play games created by other users. Initially, Roblox had a user base of several hundred people. Today, more than 36 million users play and interact on Roblox on a daily basis.

There are two crucial parts to Roblox's business model. The first part is the gaming platform on which users (developers and gamers) build and play games. Here, 7 million developers are building what Roblox calls "experiences" -- games, virtual items, and worlds. Thanks to Roblox's tools, it is easy for even children to create exciting games using Lego-like blocks instead of code. 

With 18 million experiences available to choose from, Roblox can easily attract new users and retain old ones. And as more users join Roblox's platform (and spend money on those games), developers are incentivized to create more engaging content -- drawing in even more gamers.

But that's just half the story.

When users enter Roblox, they usually invite their friends to join them. Then those friends invite their friends, and so on. With endless experiences to choose from, this virtuous cycle sustains Roblox's network effect. Sound familiar? That's how Facebook grew into what it is today. 

And because these games are not "just" games -- they are Minecraft-style worlds with plenty to discover -- Roblox's users spend lots of time on the platform. Even users who aren't gamers stick around just to hang out with each other. Like Facebook, Roblox is a social network.

Backed by the sheer size of its community, Roblox has managed to carve out an ecosystem with its own rules, economy, and currency. Users don't have to pay to play most games on Roblox. But they can buy and spend Robux -- Roblox's in-game currency -- to upgrade their avatars with accessories, clothing, or special powers.

To generate revenue, Roblox gets a 30% cut on user spending. The rest goes to developers on the platform. It also earns a commission when developers convert Robux into real dollars. So far, all this has worked out well for Roblox. Revenue grew 56% in 2019 to $488 million. In the first nine months of 2020, revenue grew even faster -- rising 68% to $589 million.

Roblox is just getting started

COVID-19 was a turbocharger for Roblox, just like it was for many other video game companies. Roblox's daily active users jumped 97% year over year in 2020 -- the fastest rate of growth ever. Many of Roblox's users are still new, but will likely become more engaged over time. As they discover great games to play and immerse themselves in Roblox's many communities, they will naturally spend more Robux.

Roblox is also targeting international markets to grow its user base further. It has invested in automated translation technology and a regional compliance system that will help developers reach a bigger global audience. It is also working with Tencent Holdings to grow its business in China, the world's biggest video game market.

Beyond gaming, Roblox's potential dramatically widens its addressable market. It aims to evolve into what it calls a "human co-experience" platform where people can come together to play, learn, and work. For example, Roblox could host virtual classes, alongside graduation ceremonies, corporate meetings, and concerts in the future. Moreover, as its social network grows, Roblox will become even more attractive as a marketing tool. In fact, major brands like Netflix and Marvel have already introduced branded content onto the platform. 

For Roblox, all these opportunities represent potential growth engines -- and a bright future. While it is unlikely that all of these ventures will end up being a runaway success, some will, and that will be enough to keep Roblox growing fast for many years ahead.

It will be a volatile ride ahead

2020 was the year of the red-hot tech stock. Popular names like Square and MercadoLibre are trading at steep valuations after rising 240% and 180% last year. Newer tech IPOs like Unity Software and Airbnb have more than doubled from their offering price.

Roblox will likely get a similarly warm welcome, along with a high IPO valuation. That's understandable, given Roblox's track record of rapid growth -- as well as the potential to sustain it for many more years.

Still, that's no reason to leave caution to the wind. Investors should not overpay for a stock, no matter how great its prospects look. Also, Roblox is running at massive losses, and this may be the case for years ahead.

It's not unusual for high-growth companies to invest heavily to fuel market-beating growth. But a loss-making business and high valuations make any stock extremely vulnerable to a market correction. And given how shaky tech stocks are these days, Roblox won't be in for a smooth ride. 

Roblox may be all fun and games. But its stock won't be for the faint-hearted.

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