Roblox has conquered many American kids’ computers and smartphones. Even so, investors should be wary of throwing in with the tide of youthful enthusiasm.
Readers who aren’t parents may have escaped Roblox’s domination, but anyone with someone in the house under age 18 is unlikely to have missed it. In fact, as of July 2020, the company told The Verge that more than half of U.S. kids under age 16 played the game. In Roblox, players explore a virtual world where they can build their own games or play games from third party developers. The platform itself is free, but the company generates revenue through in-game purchases conducted with an in-game currency called “Robux.” These allow users to secure perks such as greater customization or virtual pets. Because of Roblox’s format, it has often served as a virtual hangout spot for kids kept apart by pandemic precautions. This explains why, though the game has been available since 2006, it has grown by leaps and bounds in the past 12 months.
Roblox is a private company, but it announced plans to go public last year. It had first scheduled an initial public offering for December. After pushing the offering back, the company now says it is planning a direct listing in February instead. This method, employed by other tech companies including Spotify and Slack, allows stakeholders and employees to sell stock to new investors right away. Earlier this month, Roblox was valued at $29.5 billion, a huge jump compared to a valuation of $4 billion last February.
Did Roblox benefit from vast swaths of people, including its target audience, being forced to stay home more in 2020? Absolutely. CNBC reported that its third quarter revenue jumped 91% compared to the third quarter of 2019. The company now claims 31 million daily active users, up from the 17.6 million it cited in its 2019 prospectus. But the gap in valuation between $4 billion and nearly $30 billion is massive. It is nearly impossible to argue that Roblox’s growth was sufficient to support it, especially as the company still is not profitable.
I recently observed in this space that my colleagues and I do not believe the stock market as a whole is overvalued. That is still true. But it does not mean there aren’t pockets where enthusiasm outpaces reasons for it. Shares of companies focusing on electric vehicles and alternative energy have been bid to unusually high levels, despite their speculative nature. Tech companies, especially tech IPOs, are prone to excite investors, whether such excitement is merited or not. Part of the reason Roblox pushed back its December IPO is that tech companies Airbnb and DoorDash experienced IPO “pops,” in which their stock prices leaped by significant amounts after trading began. DoorDash, on which I turned a skeptical eye in the past, obviously benefited from the increased numbers of Americans eating at home in 2020; for Airbnb, the effect was more mixed, with fewer people traveling but those who did valuing the ability to keep their distance. In both cases, investors were hungry for the companies’ stocks, above and beyond what the experts in the IPO process anticipated.
Roblox may well be a viable long-term business. Despite the fact it is not profitable, it has been around since 2006 and boasts millions of devoted fans. But at $30 billion, the company appears overvalued. While some games and game platforms maintain long-term engagement – World of Warcraft continues to engage players more than 15 years after its release – fads with widespread appeal come and go by their nature. And because the platform is aimed at kids, users may naturally outgrow it even as younger players move to a future competitor. The gaming market tends to move fast, and long-standing titles and platforms are the exception rather than the rule.
There is nothing wrong with kids enjoying Roblox, excessive screen time concerns aside. But investors should take a critical look at the extent to which the company’s popularity is sustainable.