Roblox (NYSE: RBLX) shares jumped on Wednesday, the first day of dealing following the stock’s direct listing. Unlike a traditional IPO process, a direct listing allows the company’s existing shareholders to sell stock directly to the public.
In a typical IPO process, an investment bank usually underwrites the offering, providing assurance the company can sell all the shares offered. This can be helpful if the business is relatively unknown or market conditions are unfavourable.
But that wasn’t the case for Roblox. Investor demand for the videogame business was so high it seems existing shareholders couldn’t meet the demand for buyers. Roblox shares jumped 54% from their listing price on Wednesday, valuing the company at around $40bn, a sharp increase from its last private funding round. That round valued the business at just $4bn.
Booming demand
I think it’s easy to understand why investors are rushing to grab a share of the business. The group has enjoyed tremendous growth during the coronavirus pandemic, as many other gaming companies also experienced growth. Management expects this growth to continue, forecasting revenue growth of as much as 64% in 2021, to $1.5bn.
The platform has 37m users, and more than 8m developers use Roblox’s tools to design 3D virtual experiences. The platform is a one-stop-shop for all gaming needs. There are a wide variety of games to play, creation tools and extensive social interaction tools.
At the core of the platform is a currency known as Robux. Users can either acquire Robux or earn it by designing games. The whole system is built to encourage users to spend and make money. Players receive discounts on bulk purchases of Robux, and the currency is primarily spent on accessories to spice up players’ avatars.
In the company’s 2020 financial year, Roblox users spent $1.9bn on the game platform. Developers are paid 70% of the money spent on their games.
This ecosystem has created a virtuous cycle. The developers and players have been drawn in by the potential for real monetary awards. And if this cycle continues, the company’s revenue and earnings may continue to grow year after year. This would likely drive Roblox shares higher in the long run.
On the other hand, if players start to leave the platform, that growth may slow.
Should I buy Roblox shares?
The company’s growth over the past 12 months has been nothing short of outstanding, but I think its valuation looks stretched. With a market capitalisation of $40bn, the business is valued at 27 times sales. By comparison, competitor Electronic Arts Inc sells for less than seven times sales. That’s a big difference.
Based on these figures, I wouldn’t buy Roblox shares today. The company has achieved much over the past few years but, right now, it looks as if there’s a lot of optimism baked into the share price. If the corporation can meet investors’ high expectations, it could grow into its current valuation. If not, the stock may see a re-rating lower.
