It has been a while since we have seen an interesting IPO, as the public market continues to move towards SPAC mergers and ICOs. Thankfully, this week, we got an interesting one — Roblox! You may have heard of it, considering it is one of the most popular entertainment platforms out there right now. With millions of players and interest from funds trying to capitalize on the gaming craze, it was inevitable that the company would have a successful IPO. However, we are asking the question: Is Roblox Stock worth the investment at the current price? Let’s summarize the company and make a prediction based on the facts below.
What is Roblox?
First, let’s start with the basics. How did Roblox start and what do they do?
According to the company’s S1 Filing:
The story of Roblox began in 1989 when our founders, David Baszucki and Erik Cassel, programmed a 2D simulated physics lab called Interactive Physics, which would later go on to influence our approach to building the groundwork for Roblox. Students across the world used Interactive Physics to see how two cars would crash, or how they could build destructible houses. In starting Roblox in 2004, we wanted to replicate the inspiration of imagination and creativity we saw in Interactive Physics on a much grander scale by ushering in a new category of human interaction that did not exist at the time.
An average of 36.2 million people from around the world come to Roblox every day to connect with friends. Together they play, learn, communicate, explore, and expand their friendships, all in 3D digital worlds that are entirely user-generated, built by our community of nearly 7 million active developers. We call this emerging category “human co-experience,” which we consider to be the new form of social interaction we envisioned back in 2004. Our platform is powered by user-generated content and draws inspiration from gaming, entertainment, social media, and even toys.
Ok, so essentially, the company provides a platform for gamers to explore 3D worlds, what they refer to as the “metaverse.”
This metaverse combines millions of developers with tens of millions of enthusiastic gamers. The company takes pride in this science fiction style of gaming, and apparently have made it their mission to create “co-experiences.”
Sounds bullish to me.
It is becoming very clear that gaming is entering the next generation of visual enhancement, particularly 3D/VR/AR. And Roblox seems to be at the forefront of this movement.
Do you have a Roblox account? Tell us in the comments below if this is as awesome as the prospectus makes it sound.
Highlights from S1
Without getting too much into detail about company operations, etc. we want to highlight the most important elements with respect to the worthiness of the RBLX stock.
Don’t worry, we will be writing extensively on this company, because we are level 10 bullish on the future of gaming (as you can tell from our previous article on esports company Super League Gaming) #FollowTheTrend
Here are some highlights from this S1:
- Daily active users, or DAUs, on Roblox grew 47%, from 12.0 million DAUs in 2018 to 17.6 million in 2019, and grew 82%, from 17.1 million in the nine months ended September 30, 2019 to 31.1 million in the nine months ended September 30, 2020.
- Hours engaged on Roblox grew 45%, from 9.4 billion in 2018 to 13.7 billion in 2019, and grew 122%, from 10.0 billion in the nine months ended September 30, 2019 to 22.2 billion in the nine months ended September 30, 2020.
- Revenue grew 56% from $312.8 million in 2018 to $488.2 million in 2019, and grew 68% from $349.9 million in the nine months ended September 30, 2019 to $588.7 million in the nine months ended September 30, 2020.
- Bookings grew 39% from $499.0 million in 2018 to $694.3 million in 2019, and grew 171% from $458.0 million in the nine months ended September 30, 2019 to $1,240.2 million in the nine months ended September 30, 2020.
- Net loss was $97.2 million and $86.0 million in 2018 and 2019, respectively and $46.3 million and $203.2 million in the nine months ended September 30, 2019 and September 30, 2020, respectively.
- Net cash provided by operating activities was $101.0 million and $99.2 million in 2018 and 2019, respectively, and $62.6 million and $345.3 million in the nine months ended September 30, 2019 and September 30, 2020, respectively.
- Free cash flow was $35.0 million and $14.5 million in 2018 and 2019, respectively, and $6.0 million and $292.6 million in the nine months ended September 30, 2019 and September 30, 2020, respectively.
Can’t complain about anything here. The company is growing rapidly, and acquiring lots of new users.
Incredible growth in all areas of the company, from user acquisition to revenue and hours engaged. Great statistics to have for a good long term investment.
Cathie Wood Is At It Again…
For an IPO, the best way to look at the company (besides the growth statistics, balance sheet, income statement, etc.) is the level of inteerest from Smart Money investors. Like Cathie Wood.
We follow Cathie Wood and the ARK Next Generation Internet ETF pretty closely, for obvious reasons. ARK’s investing style, particularly into “next generation” technology companies has been stellar. We highly recommend watching them closely. It definitely helps one’s trading when one knows a Smart Money titan is on your side (or not).
And, what do you know…Cathie Wood took a noteworthy position in Roblox. No sooner than Roblox stock IPO’d was news released that ARKW started buying shares in the gaming company.
According to MarketWatch:
The ARK Next Generation Internet ETF ARKW, -1.20% bought over 500,000 shares of Roblox RBLX, -5.68%, the video-games developer that surged 54% in its trading debut on Wednesday. The position, worth $36 million, amounts to 0.47% of the Cathie Wood-managed fund, according to the trading position data posted on ARK’s website. The same fund sold nearly $18 million worth of Facebook FB, -2.00%.
Great growth stats, strong revenue/user growth and interest from Smart Money…very bullish.
However, do all of these add up to a buy at this price level?
Roblox Stock Prediction
Finally, as of Friday, March 12, 2021, RBLX stock closed at $69.70, down 5.68% on the day. Still well above the IPO price.
The company is currently valued at ~$38 Billion USD.
Our prediction is…to wait it out a little longer before you buy in.
Although we see massive user growth, revenue growth and interest in the company, it is quite overvalued (in our humble opinion).
According to the S1, the company has generated about $588M through the first 9 months of 2020.
Although the growth is extraordinary, you are looking at a massively overpriced stock relative to revenue. Let’s say they finished with even $1B in revenue for 2020 and grow to $1.5B all the way to the end of 2021. That is still over 15x price to revenue. Not only that, but the company is still not profitable, despite large consistent jumps in revenue.
But, even this large of a jump is not enough to fill out the current valuation.
Conclusively, for the reasons listed above, we think it is wiser to wait for a significant dip (if we get it) on RBLX stock.
It must be acknowledged that growth is significant, but the revenue and earnings have not caught up yet.
As a result, we believe it should be trading in the $30-$35 range before you get a good chance to buy the dip.
Otherwise, it is a great long term hold, all things being equal.
Will we get this dip? We think it’s likely. But, as with these popular “tech” stocks, the best move is to always buy large dips and hold for the long run.
What do you think? Buy it here or wait for a dip? Tell us in the comments!
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