Roblox, the maker of the most popular online world since Fortnight is finally going public.

Should investors jump into the metaverse with their wallets open or is Roblox just another overvalued video game company?

All your questions will be answered in this definitive guide to the Roblox IPO.

What Does Roblox Do?

Roblox is a 3-D online platform that focuses on what they call “the human co-experience”.

They enable millions of users to meet and interact in 3-D worlds, similar to an older platform called Second Life.

There are games, virtual dance parties, plane rides etc. anything the community decides to make and participate in.

The worlds are entirely user-generated, with nearly 7 million active developers.

When users sign up for a Roblox account, the majority of the experiences are for free.

The Platform

Roblox Client

This is the application that allows users to interact in their 3-D worlds.   When signing up for Roblox, users can personalize their avatars by selecting body type, gear and accessories etc. before entering the worlds. 

The Roblox Client operates on iOS, Android, PC, Mac, and Xbox, and supports VR experiences on PC using Oculus Rift, HTC Vive, and Valve Index headsets.

Roblox Studio

Roblox Studio is a series of tools and services for developers to use to create interactive worlds (including programs, forums, tutorials etc.)

Roblox Cloud

It’s easy for developers to build “experiences (e.g. games, hangouts etc.)” and publish them to the Roblox Cloud platform so that they’re available on Roblox Client for the millions of Roblox users.  Roblox provides developers with services such as: billing, collections, content moderation, translation, safety, regulatory compliance, and customer support. This makes it easier for small developers or individuals to be successful.

How They Make Money

Source: Roblox

For Users

  • Users are able to buy Robux, a currency that is purchased on the Roblox Client and Roblox website.
  • This allows users to buy experience enhancements.
  • Roblox works with most payment and gift card processors (i.e. Amazon, Apple ePay PayPal etc.)
  • Users can also use Robux to buy clothes and emotes from the Avatar Marketplace.
  • Roblox has a Roblox Premium monthly subscription where users can get discounted Robux, items and in-experience features.

For Developers and Creators

Roblox takes a portion of every Robux transaction and distributes the rest to developers and creators. “Developers” make the 3-D worlds, “Creators” make the clothes, accessories etc. worn by the Avatars of users in the game.  They can earn Robux by:

  • The sale of access to their “experiences” + upgrades
  • Payouts that reward developers for the amount of time that Premium Subscribers spend on the platform.
  • Sales of content and tools between developers
  • Sales of items to users through the amazon marketplace
  • When users buy and spend Robux on Roblox, developers get 70% of the Robux spent inside their experiences and 70% spent on items they sell on the Roblox Studio Marketplace. Creators get 30% of the Robux spent in the Avatar Marketplace.

A COVID-19 Growth Winner Hands Down

Roblox has been one of THE COVID-19 success stories.

Only Peloton and Zoom have done better.

No matter which metric you look at, Roblox was setting records in 2020.

Yes, daily active users doubled from 19 million to 37 million.

Source: Roblox S-1, Grizzle Estimates, Company Guidance

But what was even more impressive to us was the change in user behavior.

The average Roblox user spent half a hour longer in the “Metaverse” in 2020 which may not seem like a lot but was actually a 20% increase in daily playtime.

Source: Roblox S-1

The most impressive metric was money spent.

Roblox users not only spent more time logged on in 2020 they also spent big. 

Spending on avatars, games and items grew 40%, truly incredible growth.

Roblox S-1

We think it’s clear the pandemic has helped Roblox reach a whole new group of gamers which will benefit the platform’s reach and growth for years to come.

Peak Pandemic Means Disappointment Could be on the Horizon.

So far we’ve had nothing but good things to say about Roblox the company, but this is an investing guide after all so we have to talk about Roblox the stock.

Here is where the good news ends.

The pandemic has been so good to the company that it will be impossible to avoid weakness in almost every metric as kids go back outside and return to school.

The company even warned investors in a recent press release that hours spent on the platform could actually decline in 2021, something we think is almost guaranteed if you look at hours per user.

Source: Roblox S-1, Grizzle Estimates

On top of falling usage, less daily spending will eventually translate into slower revenue growth.

Source: Roblox S-1, Grizzle Estimates

The Difference Between Bookings and Revenue
When a user exchanges $1 of cold hard cash for robux, the in-game currency and buys a digital hat for example, Roblox recognizes $1 of bookings in that same quarter. However that $1 is recognized as revenue over the life of the customer meaning revenue may be only $0.25 or less that quarter. Revenue lags bookings.

Revenue lags bookings which means lower bookings in 2021 translates to slower revenue growth not just in 2021 but also in 2022 as well.

An expensive stock coupled with slowing revenue growth are a bad combination.

ROBLOX Revenue Growth Declining Through 2022

Source: Ycharts Estimates, Grizzle Estimates

The Valuation of Roblox is Closely Tied to Unity Gaming

For clues on how the market will value Roblox as a public company, you need to pay attention to Unity Gaming.

There are three main reasons for this.

  1. Unity recently went public so the stock price still reflects the market’s view on the value of the online gaming niche more than individual results from Unity specifically. Investors are basically using the same valuation multiple for both companies.
  2. Unity has significant business overlap including users, developers and the way they both monetize their software. Not to mention the companies both generated similar revenue in 2020.
  3. Unity’s public stock price has clearly impacted the value of Roblox in the private markets judging by the huge jump in valuation from 2020 to early 2021.

A simple price chart makes a strong case that Unity’s public market value is influencing Roblox’s private market value.

Roblox was trading privately for only $6.34/sh as recently as April 2020.

That all changed once Unity went public.

Unity rocketed from the $22/sh private price to a $52/sh IPO price and peaked at over $150/sh by Christmas.

Roblox raised a huge funding round only a few weeks after Christmas at a $45/sh valuation, up 7 times from last April!

We think Unity’s share price definitely helped get that deal across the finish line.

Roblox Private Value vs Unity Public Value

Roblox + Unity S-1

Now with Unity’s share price down 46% from December’s high, it may become an anchor on where Roblox will trade if the share price weakness continues.

What is Roblox Worth?

We think this question is relatively easy to answer only looking one or two years into the future.

Looking out longer term is much more difficult.

Even with the worsening results we mentioned above, we think Roblox is essentially a digital theme park with many years of solid player and revenue growth ahead.

However, even the best business can still turn into a money-losing stock if the price is too high.

Roblox is that stock.

Roblox will likely begin trading for a minimum of $50/sh giving it the same $33 billion market cap as Unity Software.  A $50/sh stock price would mean Roblox is trading at 21x estimated 2021 sales.  

Unity is Still a $25Bn ($33Bn Diluted) Company

There is additional upside if investors are particularly excited about owning Roblox.

Even with equal market caps, Unity’s sales multiple is 26% higher than Roblox in 2021 and 9% higher on 2022 numbers.

We think Roblox could trade for $65 or potentially higher in a bull case scenario.

However, Grizzle will not be buying Roblox at $65/sh or even $50/sh.

The risk of disappointing numbers as we transition out of a COVID lockdown world will keep us on the sidelines for now.

21x-26x sales is very rich for a company that we estimate may grow revenue only 15% in 2022 and has said they will favor growth over profits for years to come.

Don’t forget that Roblox raised money for only 6x sales less than a year ago!

Tech companies growing revenue slower than 15% typically trade at multiples below 16x, 25% lower than where Roblox last raised money.

Software Stock Price to Sales Multiples by Growth Bucket

Source: Clouded Judgement

The Bottom Line 

We will wait to see how far usage, spending and growth fall through 2021 before confidently buying in for the long hall.

A 20x+ sales multiple is just too expensive and could fall without warning due to factors outside of the company’s control as we’ve seen recently. (rising interest rates for example)

We will buy a bit if the stock falls below $30/sh and would buy hand over fist if the stock falls to $20/sh or below.  

Unity Multiple Down 40% and So is the Stock

Source: Ycharts

Disclosure: The Author does not own shares of Roblox at the time this article was published.

About Author

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.