Booming gaming platform for kids Roblox (RBLX +4.39%) hit the public markets this week with a direct listing after dropping its initial interest in conducting a traditional initial public offering (IPO). The company had filed its S-1 Registration Statement back in November, and it showed phenomenal growth driven in part by the COVID-19 pandemic, which forced many people to stay home and bolstered demand for home entertainment options.
Roblox is comparable to Minecraft, which Microsoft acquired in 2014, in that it is a broad gaming platform that fosters creativity and caters overwhelmingly to young children. After the exchange set a reference price of $45, which is specific to direct listings and mostly serves as historical context to investors as opposed to the offering price in an IPO, the stock promptly sprinted out of the gate. Could Roblox be a top performer in 2021?
Image source: Roblox.
Surging engagement during COVID-19
Roblox's prospectus now includes financial information for the fourth quarter and full-year 2020. As one might expect, the business continued to enjoy strong growth to close out the year. There are three core operating metrics for investors to watch: daily active users (DAUs), hours engaged, and average bookings per DAU (ABPDAU).
|
Metric |
2018 |
2019 |
2020 |
|---|---|---|---|
|
DAUs |
12 million |
17.62 million |
32.59 million |
|
Hours engaged |
9.43 billion |
13.65 billion |
30.6 billion |
|
ABPDAU |
$41.53 |
$39.40 |
$57.77 |
Data source: Prospectus.
Hours engaged dipped slightly in the fourth quarter on a sequential basis, from 8.7 billion to 8.4 billion, but ABPDAU ticked higher to a record $17.30. Roblox notes that monetization tends to be very seasonal, with more users typically buying digital currency (Robux) and virtual goods over the holiday season.
In terms of financial results, revenue soared by 82% last year to $923.9 million, while bookings surged 171% to $1.9 billion in 2020. However, Roblox's operating loss roughly doubled to $1.2 billion. The company is investing heavily in research and development as it hires employees and develops new features and functionalities for the platform to drive future growth. Stock-based compensation has also skyrocketed due to aggressive hiring activity -- Roblox hired over 360 full-time employees last year to finish 2020 with 960, with nearly 80% of all workers being engineers and product developers.
Additionally, Roblox received another bullish vote of confidence from ARK Invest, led by widely followed institutional investor Cathie Wood. ARK has a unique practice of sending out daily emails that disclose what its actively managed ETFs are trading. In this case, ARK Next Generation Internet (ARKW +0.26%) scooped up approximately 520,000 shares on the first day of trading. The notifications do not detail what prices were paid, but the position represented 0.47% of the portfolio.
Image source: Roblox.
How will Roblox fare in a post-pandemic world?
Like other companies that became inadvertent beneficiaries of the pandemic, the lingering question that Roblox faces is what happens to engagement as the world slowly returns to normal. Vaccine distribution is ramping up faster than expected and more schools are transitioning back to full-time, in-person learning (54% of DAUs are under the age of 13).
Roblox does not believe the heightened levels will persist, warning: "We do not expect these activity levels to be sustained, and in future periods we expect growth rates for our revenue to decline, and we may not experience any growth in bookings or our user base during periods where we are comparing against COVID-19 impacted periods."
The company adds: "Further, as a result of global economic conditions, users may reduce their discretionary spending on Robux, may not renew their subscriptions or may otherwise reduce their usage of our platform, which would adversely impact our revenue and financial condition."
Roblox is already commanding a market cap of nearly $40 billion, which translates into a lofty price-to-sales ratio of over 40. Investors are pricing in considerable growth going forward, and the company has the potential to keep delivering upbeat results even after market conditions normalize, as it has established its brand and platform as a top destination for young gamers.
Still, the valuation seems a bit excessive considering the post-pandemic uncertainties, and it may take time for Roblox to grow into its market cap. I'll be sitting this one out.
