The Roblox (NYSE:RBLX) share price exploded on its first day of trading last week. The recently-listed US stock opened for the first time on March 10 at an issue price of $45. The share price quickly soared by more than 60%, reaching as high as $75.
That’s quite an impressive level of growth for only 24 hours of trading, in my opinion, even though it has fallen back a little since then. So, should I be adding the stock to my portfolio? To answer that question, let’s take a look at what Roblox does and the challenges that lie before it.
A gaming giant for younger audiences
Roblox is a video game company. But unlike a typical game developer, the players are the content creators. They can design and share their own mini-games, levels, and puzzles without needing any advanced programming knowledge. I think this is rather ingenious. Let me explain why.
Games usually only have a limited amount of content. And so, the player base begins to contract within a relatively short period of time. But by having a continuous stream of new content being created by the players, Roblox extends its playable lifespan at little expense beyond keeping the servers online and tools up to date.
In addition, this generates a network effect. As new players join the community they have an enormous library of experiences to enjoy. Some of these new players may try their hand at creating their own mini-game within Roblox. This in turn adds more content that attracts even more players and the cycle repeats itself. In my experience, network effects are powerful business drivers. Therefore I think the Roblox share price may be able to grow substantially in the future. But as with every investment, there are risks to consider.
Several risks lie ahead
Over the last 16 years since Roblox launched, its player base has grown to over 31 million daily active users. However, the vast majority of these players are children. This exposes the company to additional online legislation that provides greater protection to younger people when interacting online. Any breach of these laws would land the business with substantial fines, as well as significant reputational damage that would likely cause the Roblox share price to suffer.
Another risk to consider is how Roblox makes money. The game itself is actually free to play, but players can purchase in-game currency to unlock extra content through micro-transactions. Making the game available for free has undoubtedly helped in growing the player base. However, each additional player increases server costs and not all of these individuals will end up spending any money. Consequently, the firm is currently unprofitable, with no clear guidance as to when that may change.
Should I buy Roblox at its current share price?
I really like the business model of Roblox, as it has some significant advantages over competing video game developers. However, as an investor, I think the Roblox share price is far too high.
The current market capitalisation of the company is just over $38bn. Comparing that to the $589m of revenue generated in the first nine months of 2020 places the P/S ratio at around 64. Personally, I think there are other growth opportunities available right now at far better prices, so I’m not adding the stock to my portfolio today.
