IPO Analysis: Is it a Good Time to Buy Roblox Stock?

Author: Finscreener

Estimated read time: 3 minutes

Publication date: 26th Mar 2021 18:40 GMT+1

Investing in IPOs (initial public offerings) continues to excite growth investors. It gives you a chance to bet on the growth story of a company that is looking to raise equity capital to focus on expansion. Earlier this week, one of the world’s most popular video game platforms- Roblox Corp. (NYSE: RBLX) went public.

Roblox priced its IPO at $45 per share and began trading at $64.5 on March 10. It ended the day at $69.5 indicating a return of 54% for IPO investors. Roblox stock gained another 6.3% yesterday to end trading at $73.9, valuing the company at a market cap of $38.26 billion.


A few important metrics for Roblox

Roblox aims to build a platform where users can come together to play, learn and communicate. It is powered by a community of eight million developers who produce their own multiplayer experiences using the company’s desktop design tool called Roblox Studio.

Roblox claims it is ranked as one of the top online entertainment platforms for users and audiences under the age of 18. This is based on average monthly visits and time spent on its platform.

Roblox ended 2020 with 32.6 million daily active users (DAUs), $924 million in annual revenue, $1.9 billion in bookings, and $524 million in operating cash flow. However, the company posted a net loss of $253 million last year.

The company’s DAUs grew by 47% from 12 million in 2018 to 17.6 million in 2019. Amid the pandemic, DAUs were up 85% year over year in 2020.

The number of hours engaged on Roblox grew by 45% to 13.7 billion in 2019 and by 124% to 30.6 billion in 2020. Further, daily paying users soared from 125,000 in 2018 to 184,000 in 2019 and to 490,000 in 2020.

Revenue growth also accelerated from 56% in 2019 to 82% in 2020. The company’s bookings grew 39% to $694.3 million in 2019 and by 171% to $1.9 billion last year.


Is the stock a good long-term buy?

The company has estimated about 25% of all kids in North America under the age of 24 play its games at least once a month. It is quite evident that the pandemic forced people to stay at home that has benefitted gaming companies as entertainment options were few and far between.

Now, as kids return to school there is a good chance that the number of hours spent on the Roblox platform may even decline in 2021. This will translate to lower spending and impact top-line growth.

For example, when a gamer exchanges $1 for the in-game currency, the company recognizes this amount as bookings in the same quarter. Now, this amount is recognized as revenue over the life of the customer, which suggests the revenue will be significantly lower in that quarter.

In a nutshell, the revenue of gaming companies lags bookings and this may impact top-line growth in the next two years.

Roblox is trading at a trailing price to sales multiple of 41.3x which is sky-high. Given that the company is still reporting a net loss coupled with its slowing revenue growth, there is a good chance that the stock will remain volatile in the near-term.

Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.