There's no shortage of investor optimism in video game platform Roblox (RBLX 2.90%) -- perhaps for good reason. The company already commands a massive market cap of $39 billion as of Tuesday's close, a sky-high premium given the company hauled in just $924 million in revenue in 2020. However, Roblox has a young and growing user base and has its eye on blurring the lines between the real and virtual world. This could be a millionaire-maker stock -- but just remember to start small if you decide to buy now.
A chance to grow with "Generation Z"
Roblox operates a free-to-play virtual world where users can meet, build, and share experiences together. The basic user metrics are impressive: Over 8 million developers using Roblox Studio to create 3D multiplayer experiences and games, 32.6 million daily active users (DAUs), and nearly $1.88 billion in bookings (money moved to Roblox but not spent yet) in 2020.
As impressive as the user counts are, paying up for this video game stock may give some investors pause. Roblox's initial 2021 forecast is for DAUs to increase only 6% to 12%, for revenue to grow at least 56% to $1.44 billion to $1.52 billion, and for bookings to increase at least 6% to $2.0 billion. Trading at 26 times expected sales for the next 12 months, this is one expensive video gaming stock.
But here's the thing: Roblox doesn't see itself as just a video game company. Rather, this is a bet on the "metaverse," a virtual world in which people can interact and play together. Think of the digital realm from the movie Ready Player One. Perhaps you're uncomfortable with this notion of real-world interaction being replaced by a type of virtual reality, but the vast majority of Roblox's users are in their teenage years or younger -- the nearly 70 million "Generation Z" kids born from about 1997 to 2012.
That's right, Roblox is collecting billions of dollars a year, mostly from teenagers in the U.S., and has the opportunity to expand its bookings to its mostly international following (two-thirds of DAUs are outside the States, but only one-third of bookings come from this cohort) as the global middle class develops and accumulates more wealth over time.
If Roblox can command such dollars from the youngest part of the population now, what could it achieve later when these young people start to enter the workforce en masse? After all, Gen Z was born with technology a part of everyday life. Making friends from around the world on social media is normal. Some of them spent the last year getting educated via online video conferences. Cryptocurrency and digital money isn't an ambiguous concept.
Roblox could take its platform in any number of directions: A communications or social media site, an online learning and education service, a workforce and collaboration platform, even a digital economy (Robux, which can be spent in-game on things like avatars, outfits, and other digital items, can be purchased with and exchanged back into dollars).
Clearly there is some serious potential for this already large video game platform to get much larger over time.
How and when to buy
But there's no denying Roblox will need to grow into its sky-high valuation. The company is profitable by some metrics (it generated positive free cash flow of $411 million in 2020). At over 26 times forward sales and over 90 times trailing 12-month free cash flow, shareholders are expecting growth to continue at a rapid pace.
However, the company has indicated a slowdown in its trajectory as it starts to lap the effects of COVID-19 last year (users and bookings boomed during lockdowns and social distancing), and it's as of yet unclear if it will return to a higher double-digit percentage rate of bookings growth later on.
Thus, even though this is a chance to bet early on Gen Z's economic activity, I'm personally exercising patience before I decide to buy. I usually wait until a quarter or two of financial results are released before buying a fresh IPO stock, and Roblox is no exception. Share prices can be incredibly volatile early on as shareholders digest public financial information for the first time, and some early investors may decide to take some profit and reduce their position (which could put short-term pressure on Roblox's stock price).
Nevertheless, this company is certainly worth keeping an eye on, at the very least. If and when you decide to buy, start small and be patient. I usually start a position in a new stock at no more than 1% of my portfolio's value, often at 0.5% or less of my portfolio value so I have room to buy more over time (perhaps on a quarterly basis, or to take advantage of big double-digit dips in share price). I'd caution a prospective investor to do the same here.
The hype surrounding Roblox isn't without cause, though. This video game platform could be a major player in the digital economy in the decade ahead (and beyond) as Gen Z starts to reach adulthood. If Roblox grows up along with them, it could be a far larger business than it is right now and become a millionaire-maker stock for those who (cautiously) buy in early on.