Roblox is one of the most popular gaming platforms in the world and there is a good case for saying that their unique model is revolutionizing gaming. The company had initially planned to do an IPO and filed its S-1 statement in November of last year, but changed course and will now be directly listing.
Testing a Hybrid Listing Model
The IPO model has come under a great deal of criticism for doing more to line the pockets of investment bankers than to benefit the companies that were listed. Investors such as Bill Gurley have pointed to how big IPOs pop on debut as evidence that stocks are deliberately underpriced to investment bankers and other intermediaries. Changes in SEC regulations now allow companies to list using a hybrid model, something which Gurley believes will be the end of the traditional IPO.
Roblox delayed their IPO as part of a deliberate attempt to improve the process. The firm was able to raise $520 million by way of a series H private placement which valued it at $29.5 billion. Having raised this sum, the company will be able to go public without needing to raise capital through an IPO. Roblox will become the first company to use this hybrid listing model. Companies like Peter Thiel’s Palantir Technologies Inc (NYSE:PLTR) and the music streaming service Spotify (NYSE:SPOT) have done direct listings.
Disrupting the Gaming Space
Game development and "easy" are two things that are not commonly said in the same sentence. Absent expert coding skills and oodles of time, it is very difficult to develop a game. This is true even though engines such as Epic Games' Unreal Engine and Unity Software, have streamlined the process.
Roblox’s platform offers a simplified development process wherein developers can build games using interactive blocks. The system lights on resources because it is built on the Lua programming language. The design is so simple that children often design games aimed at other children. Within this self-sufficient ecosystem, users can learn how to build games, and how to monetize those games, and they are given a space to interact with each other. The games can be played on Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), and Google (NASDAQ:GOOGL) devices and consoles.
Children form the greater part of Roblox' users. They can create an avatar which works across all titles. Playing games is free, though the company issues a digital currency, Robux, which users can buy in order to enhance their characters or make in-game purchases. Robux is convertible into real-world money.
Robux also earns revenue from renting out servers for virtual gatherings such as virtual birthday parties.
Anyone can build games on the platform, though a large number of developers choose to charge fees for in-game features, items, and other assets. These fees are paid using Robux. Developers can, therefore, turn in-game earnings into real-world profit.
Product Fit is Great
In a July 2020 report, RTrack estimated that Roblox grew its monthly active users (MAU) by 6 million over the prior month, to 164 million. Roblox has not provided an update on its MAUs since its last IPO filing.
Third-quarter revenue shot up 91% against the same period last year, to $242.2 million. Nevertheless, net losses doubled to $48 million. Third-quarter growth is part of a bigger story, the story of Roblox' scorching performance in growing its revenue. In the first nine months of the year, revenue grew by an unreal 68%, to $589 million.
Investors will be particularly intrigued by the company’s order bookings, which rose 171% to $1.24 billion. This is a great signal of growth ahead because Robux only recognizes sales as revenue when a holder of the company’s digital currency, Robux, spends it or converts it into real-world money. At present, the average period in which this happens is 23 months. So a rise in order bookings today points to revenue growth within the next two years.
Ordinarily, net losses which seem to be a feature of many IPOs, would be a big concern, but in this case, they seem to be a consequence of the company's delayed revenue recognition model. Free cash flow stood at $293 million for nine months of 2020. The combination of the revenue recognition model at a time of swelling free cash flow is to lower the tax burden of the company.
It must be said that the life cycle for a paying user is good but not great. Netflix (NASDAQ:NFLX), by way of comparison, has a monthly churn rate of 3%, and a life cycle of 38 months. Netflix not only enjoys a more elongated user life cycle, but also has more predictable revenues as they are based on regular subscription fees, not ad hoc purchases.
Daily active users nearly doubled in the year up to the end of September, 31.1 million against 17.6 million for the whole of 2019.
2020 was, from a financial perspective, the company's best year ever because the pandemic led to people spending more time online than at any point in history.
Disruptors such as DesignBro, Roblox, Airbnb (NASDAQ:ABNB) and other platforms, have thrived as the world has shifted toward the digital. The company's success in gaining users looks set to be replicated with its success in wooing investors.