Roblox (NYSE: RBLX), the multi-platform gaming product that exploded in popularity during the pandemic as children looked for ways to stay entertained, also took off on Wall Street yesterday when it made its market debut on the New York Stock Exchange.
This article was originally written by MyWallSt. Read more market-beating insights from the MyWallSt team here.
Roblox’s stock closed the day at $69.50 per share, pushing the online gaming company’s market cap up to $38.26 billion. Shares began trading at $64.50, up 43% from the private financing round in January when the company sold the stock at $45 per share.
The company decided to go public via a direct listing, so it did not create or sell any new shares. Instead, Roblox allowed existing investors to sell their stock to the public. CEO David Baszucki had previously planned to go public back late last year with a traditional IPO, however, once the company saw how Airbnb and DoorDash underpriced their shares, resulting in a significant discount for their early investors, Roblox did not want something similar to happen to them. Then Roblox had to delay its market debut again last month when the SEC scrutinized how the company recognizes revenue from sales of its digital currency, Robux.
Roblox’s growing popularity
2020 was a massive year for the company. A staggering three in four U.S. children aged between 9 and 12 are on the platform, as is one-in-two UK-based 10-year-olds. The company became a household name this year as it offered something different to its players — Roblox is not just a game, it’s a platform to build games. Therefore, many older players have stuck around to build their own games and make some cash, which has driven engagement. Players create an avatar and move through the different games on the platform, going from theme parks to owning virtual pets, and battling enemies with their friends. Users who were previously only gamers have found a knack for developing, which has made it one of the top-grossing apps on Apple and Google devices.
The popularity of the platform has resulted in revenue jumping 82% in 2020 to $923.9 million. However, the company’s net losses also widened from $71 million in 2019 to $253.3 million in 2020. The main reason for these losses was that Roblox almost tripled the amount of cash it paid to developers through its revenue sharing program. Lots of Roblox developers within the platform have made a tidy profit, over 1,250 game creators made at least $10,000 in 2020 through virtual sales in their games.
Risks of investing in Roblox
Even with Roblox’s successful direct listing and strong year, the stock is still hard for investors to value. The main reason being is that no one knows how popular the gaming platform will be once school resumes and sporting activities are back for children. The company’s overreliance on kids puts the business model in risky territory. As we have previously witnessed with children’s gaming fads that have fallen by the wayside — such as the Ratchet & Clank franchise — kids easily move on to the next exciting thing.
To combat this problem, Roblox has been busy adding content for more mature audiences, including educational experiences, virtual concerts, and meetups.
Is Roblox stock a buy?
Roblox is set for massive expansion, expecting revenue to jump from between 56% and 64% to between $1.44 billion and $1.52 billion this year, suggesting higher revenues per player. On Wednesday, Baszucki stated:
“Roblox has been growing for 15 years, driven by our community, driven by the awesome content, driven by our creators, and driven by our ability for people to do things together. That’s a long-term growth path, and we believe that continues forward, even after Covid.”
Yet, Roblox is still being realistic that growth will be much slower than the levels the company witnessed during the pandemic, with daily active users only increasing 6% to 12%, while total engagement hours are predicted to be roughly flat. At Roblox’s opening price yesterday, the company was valued at around 29x revenue for 2021.
MyWallSt gives you access to over 100 market-beating stock picks and the research to back them up. Our analyst team posts daily insights, subscriber-only podcasts, and the headlines that move the market. Start your free trial now!
Disclaimer Past performance is not a reliable indicator of future results.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.
*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.