In early March, gaming operator Roblox (NYSE:RBLX) launched one of this year’s hottest IPOs. On the first day of trading, RBLX stock jumped by 54%.
This actually came after the company aggressively bumped up the price range. Even with the recent volatility in the markets, RBLX stock has been able to maintain much of its gains.
Back in 1989, co-founders David Baszucki and Erik Cassel (Cassel died in 2013 at the age of 45) started a company that used 2D simulated labs to help students learn about physics.
This technology formed the basis for Roblox, which was started in 2004. The cofounders would go on to develop 3D models to provide for highly immersive experiences.
Roblox has become successful despite the intense competition in the online gaming market. Here’s a look at how they did it, and why I think they’re bound to keep improving.
A Closer Look at RBLX Stock
Ernest Cline’s novel Ready Player One – which was turned into a Steven Spielberg movie – is about living in a virtual world, with AR (Augmented Reality) and VR (Virtual Reality). And yes, this is similar to the concept of Roblox. It’s about world building.
Roblox makes it relatively easy to do this. The company’s platform includes three key applications.
First, there is Roblox Client that allows users to explore 3D worlds. Next, there is Roblox Studio that has a set of developer tools to create games for a myriad of systems like Apple (NASDAQ:AAPL) iOS, Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) Android, Microsoft (NASDAQ:MSFT) Windows, Xbox and various RV headsets. Finally, there is Roblox Cloud, which is the infrastructure.
Beyond the tools, the company has invested heavily in ensuring a safe environment for its users, many of whom are minors, by exceeding regulatory requirements.
So with all this, Roblox has been able to create a vibrant community of more than 8 million developers. Consider that they have created over 20 million experiences.
Roblox has created strong incentives for attracting and keeping talent. In fact, being a developer has been a way of life for many. More than 300 developers have each earned more than $100,000.
The key of revenue for Roblox is selling experiences and items within the game.
Revenues grew by 82% to $923.9 million and the net cash flows came to $524.3 million during the past year. All in all, this has become a very high-margin business.
It’s true that the novel coronavirus has been a major catalyst for RBLX stock, but this does not necessarily mean that the growth will fall off.
If anything, many new users have been introduced to the platform. Roughly 37.1 million people visit Roblox every day, and the average time spent on the app came to 30.6 billion hours last year.
Bottom Line on RBLX
When it comes to gaming companies, the risks are usually substantial. Let’s face it, the business is based primarily on churning out big hits, which is no easy feat. Gamers can also be fickle, especially younger ones.
Roblox has been able to minimize these problems. Again, it’s about world-building, which means harnessing the creativity of millions of people.
It is possible to have a large number of successful niche experiences. It’s essentially like a next-generation social network. This means having powerful network effects that can be long-lasting, just as seen with other platforms like Facebook (NASDAQ:FB).
So even though RBLX stock is far from cheap – with the price-to-sales multiple at 41X – it warrants a premium valuation and could still ring up gains for investors.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.