Capital Markets

Roblox joins end-of-year rush to go public

Online gaming platform Roblox filed to go public last week, joining a host of other technology companies looking to take advantage of the surging stock market conditions, particularly in recent weeks, with higher investor optimism being helped along by good news about virus vaccine trials. Roblox’s public debut will further contribute to the record-breaking year for IPOs, with companies listing on US exchanges having raised an all-time high of $143bn year-to-date. The child-friendly gaming company, whose platform is regularly used by 75% of American children between the ages of 9 to 12, has seen a surge in demand whilst stay-at-home measures were in place. This has helped Roblox expand its revenue to $588.7m in the first three quarters of 2020, 68% higher than the same figure last year, which may show positive signs for the company ahead of its IPO despite its struggle for profitability.

Public listing overview

On November 19th, Roblox confirmed its IPO by publishing its S-1 document and releasing its financial information, roughly a month after the company confidentially filed to go public. With this announcement, Roblox joins several other technology companies looking to go public before the end of the year, including lending company Affirm and accommodation booking group Airbnb, both of whom also confirmed their listings last week. Whilst the exact details regarding the deal remain unclear, Roblox said it could raise as much as $1bn in its public offering, with JP Morgan, Goldman Sachs, and Morgan Stanley acting as lead underwriters of the deal.

Despite the early winter period usually being calmer for the capital markets, the coronavirus pandemic caused investor confidence to plummet earlier this year, dissuading public offerings from occurring during the period and meaning that 2020’s record-breaking year for IPOs has been largely condensed into the later months of the year. In a single two-week period in September, seven technology companies made their public debuts, including Snowflake Inc, which rapidly reached a $70bn market capitalisation, as well as Roblox’s competitor, Unity Software Inc. Unity’s shares have seen strong price growth since going to market, closing at $116 upon Roblox’s announcement, 55% above the price at which they went public, giving the company a $32bn valuation. Given that Roblox is both bigger in scale and growing faster than Unity, this would imply that it has the potential to achieve a considerably higher valuation than the $4bn it was able to secure in February this year – during a $150m funding round led by venture capital group Andreessen Horowitz.

Prospering during the pandemic

Enforced time indoors has lifted the entire gaming sector, but Roblox has enjoyed conspicuous success during the lockdown period. With 54% of Roblox’s users aged 12 or under, closure of schools during lockdown, alongside other stay-at-home measures, meant that players had been online more, helping the company achieve strong growth this year. The company, which was founded in 2006, overtook Microsoft-owned Minecraft for the first time in terms of daily active users, which almost doubled in the first nine months of the year to 31.1 million, spending a total of 22.2 billion hours on the platform.

Rather than creating games themselves, Roblox provides tools for developers to make their own games, generating the bulk of its revenue from in-game purchases of its virtual currency, Robux. The company’s bookings, which is a term they use to describe sales activity in a given period without including non-cash adjustments, has grown consistently year-on-year, by 62% in 2018, 39% in 2019, and 171% in the first three quarters of 2020 compared to the same period last year, reaching a total of $1.24bn. Whilst a significant proportion of this covers platform costs such as hosting, app store and payment processing fees, almost 50% of these earnings are split evenly between the company and developers. According to Roblox, its developer and creator pool earnings soared in line with rising revenues to $209.2m in the first three quarters of 2020, 190% above the same period a year earlier. However, Roblox anticipates that revenue growth rates will decline in future periods from the COVID-boosted 2020 results, with some potential for long-term negative effects on revenues if users cut spending due to global economic problems.

Difficulty despite growth

Despite record-breaking growth this year, Roblox, like many unicorns, is still struggling for profitability. The company’s losses have expanded along with revenues this year, with net losses reaching $203m in the first nine months of the year on revenues of $589m according to the IPO filing, compared with losses of $46m on revenues of $350m in the same period last year. Those losses appear to be mainly driven by rising spending across its operations, with Roblox saying it had increased spending on infrastructure, trust & safety, and research & development. Also, as the proportion of players on mobile devices rose to 72% at the time of the IPO’s announcement, the company said that paying more app store fees was affecting its profit levels.

However, on a cash basis, Roblox appears to be in much better shape than its losses would suggest. The firm’s operating cash flow, which rose from $62.6m in the first nine months of 2019 to $345.3m in the same period of this year, demonstrates the company’s potential for further growth and makes it an interesting investment opportunity.


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