educating new investors
What should I invest in is the number one question I’m asked. I want my students to focus on three things. First, What they know, like, and trust. Second, what other people are using or what your kids are bugging you about. Third, innovation or companies/ideas of the future. These investing ideas are just a start; you still need to do your research to determine if that company is a good investment for you.
Over half of the 32.6 million users on the platform are under the age of thirteen; parents already know that Roblox falls into the second category. However, Roblox stock only became available for purchase recently, the company listed on the NYSE under the symbol RBLX on March 10, 2021.
As an “older” millennial, it took me some time to figure out why Roblox is one of the top entertainment platforms for people under eighteen. The excitement about Roblox is organic. The company relies on influencer-based marketing strategy and word of mouth to drive new users. Roblox is a global social gaming platform where users can find millions of “immersive 3D” games to play, built by Roblox’s community of over two million developers and creators. Everything is centered around the user’s avatar, which is then used to participate in the platform’s games. Games are available for free on PC, Mac, video game consoles, and mobile devices. But users typically purchase virtual items to enhance their experience using the platform’s virtual currency, Robux.
Here are three things about the company investors should know.
Interested in investing in the stock market?
join the course https://the-ivy-investor.teachable.com/p/stocks-101/
Roblox is not an IPO
Roblox was a direct listing. A direct listing is when a company goes public by selling existing shares instead of offering new ones. With initial public offerings (“IPO”), the company sells equity by offering new shares to the public. The IPO process is completed by investment banks, such as Goldman Sachs (NYSE: GS). These companies take on an active role in promoting the offering by provide a roadshow to gauge interest in the offering, pricing the offering, and instituting a “lock-up period,” among other measures to provide price stabilization. In a direct offering, Investment Banks merely provide financial advising to the company.
With a direct listing, the stock’s opening price is determined by buying and sell orders collected by the NYSE from broker-dealers. Roblox listed for $45. Direct listings tend to be more volatile because investment banks are not available to provide price stabilization.
In 2018, Spotify (NYSE: SPOT) went public through a direct listing followed by Slack Technologies (NYSE: WORK) in 2019 and Palantir (NYSE:PLTR) in 2020.
The direct listing only provides liquidity to existing shareholders and does not provide funding to the company. Roblox disclosed that it might issue shares to secure additional funds to make “investments to support our business growth.” This admission was interesting because direct listings are typically not for companies in need of additional funding.
Roblox’s revenue provides more questions than answers
Roblox is a pandemic company. The global COVID-19 shelter-in-place policies fueled the company’s rapid growth over the last three quarters of 2020. Roblox conceded that it does not “expect these activity levels to be sustained.” Which leads to two points of concern. Currently, users can purchase Robux in two ways, one-time purchases or through the company’s subscription program, Roblox Premium. The vast majority of revenue is from one-time purchases. The question is what happens to the platform as shelter in place restrictions are lifted, and users are no longer confined to their homes.
Roblox was required to present two years of audited statements as an Emerging Growth Company under the JOBS Act. For the two years presented, 2018 and 2019, Roblox had to reissue its financial statements because it discovered “a deficiency or combination of deficiencies” in its financial reporting. As of December 31, 2020, the company’s deficit was $492.3 million, the concern is that if the company was required to provide more audited financial statements, would the deficit actually be greater.
Additionally, the Consolidated Statements of Operations Data reveal a troubling scenario. As the revenue increases, so do the costs. The expectation is that as revenue increases, the cost of revenue would decrease; however, here, as the Revenue increased, the costs of revenue also increased 12% from 2019 to 2020. The silver lining is that Roblox has positive cash flows from operating activities for each of the periods presented.
Apple, Google, and Amazon are always close by
I would call Alphabet (Nasdaq: GOOG), Apple (Nasdaq: AAPL), and Amazon (Nasdaq: AMZN) the “picks and shovels play” of Roblox. In 2020, over half of the company’s only significant revenue driver, Robux, came from the Apple App Store or Google Play, 35% and 19%, respectively. Currently, Roblox must pay 30% of the proceeds from in-game sales to Apple and Google.
The majority of services operated by the Roblox Cloud are hosted in Roblox-managed data centers. However, when additional resources are needed, the Roblox Cloud leverages Amazon Elastic Compute Cloud (“Amazon EC2”). Amazon EC2 is a web service that provides secure capacity in the cloud. Additionally, Amazon Web Services are leveraged for some of the company’s “high-speed databases, scalable object storage, and message queuing services.”
Final Thoughts
I would like to see the company decrease its reliance on one-time user purchases of Robux and move to more predictable streams of income, such as focusing on its subscription base and opening up the platform to more advertising and licensing agreements. I’m concerned about its main user base, children under 13. Multiple laws apply to this demographic such as the United States’s Children’s Online Privacy Protection Act (“COPPA”) and Article 8 of the European Union’s General Data Protection Regulation, or GDPR which is violated, even inadvertently, could cause loss to the company in terms of reputation and legal fees.
I would be remiss if I did not mention the singular winner of this direct listing, David Baszucki. He is the Founder and Chief Executive Officer and the largest stockholder of the company. Because he and his affiliates own 100% of the company’s Class B common stock, he welds 70.1% of its voting power. In other words, whatever David Baszucki says goes.
Generally, with notable exceptions, I will avoid IPOs for six months after listing because of the lock-up period. However, since Roblox is not subject to a lock-up period, I waiting to see how the company will fare as “outside opens up.” But since I envision my future buying more Robux for family members, I might consider dipping my toe in.
At the time of this article, I have no position in ROBLOX
Interested in investing in the stock market?
join the course https://the-ivy-investor.teachable.com/p/stocks-101/
