Should you invest in a Roblox IPO?

The company behind the popular video game platform Roblox is planning to launch soon. Originally scheduled for the holidays, the initial public offering (IPO) should now hit the stock market in early 2021 with a market value of around $ 8 billion.

When I say “roughly,” I’m probably underestimating the end result. Roblox postpones submission to allow delivery service to fine-tune asking price upward in light of explosive IPOs in December DoorDash (NYSE: Dash) and an accommodation rental specialist Airbnb (NASDAQ: ABNB).

So Roblox should run Wall Street, but will it be a good buy right away?

Roblox characters. Image source: Roblox.

What Roblox is doing

Roblox, the company, owns and operates Roblox, a video game platform. Anyone can build games with the Roblox system, where the games themselves are free, but many designers charge fees for items, features, and other in-game assets. Fees are paid in the form of Robux, a currency in play that can be converted back into real dollars. The company generates revenue by selling Robux directly to customers. Successful developers can make serious money by monetizing their incoming Robux ships.

The company does not recognize the sale of Robux as revenue until the customer in the game spends it or turns it into real money. Therefore, Roblox recognizes Robux sales over the average lifetime of paying customers, which currently stands at approximately 23 months.

The company collected $ 589 million in fully recognized revenue in the first nine months of 2020, an increase of 68% over the same period in 2019. At the same time, orders that make up the current flow of Robux purchases jumped 171% to $ 1.24 billion . In other words, Roblox can count on massive revenue growth over the next few years as this year’s Robux orders break through the revenue recognition period.

Buy now or wait a while?

Roblox has a lot to love. Customer engagement and Robux orders are growing at breakneck speed. The company is experiencing large losses basically due to delayed revenue recognition, but free cash flow reached $ 293 million in the first three quarters of 2020.

This combination of strong cash profit and significantly lower taxable income is a very effective tax strategy. Low or negative earnings can be a problem. Combined with a large cash profit, they can also be a sign of a financial management team that knows how to take every tax deduction in the book. The delayed Roblox revenue recognition is a great example of this.

The downside is that the short lifespan of the average Roblox pay-paying user worries me somewhat. Fellow digital entertainment expert Netflix 09.30 NASDAQ: NFLX consistently sees monthly outflow rates of about 3%, which takes an average lifespan per customer who pays 38 months. This is a significant advantage over Roblox’s 23-month lifetime per paying user, not to mention the fact that Netflix charges reliably predictable subscriptions, while Roblox depends almost exclusively on current Robux purchases.

Furthermore, it cannot be said exactly how expensive Roblox shares will be by the end of the first trading day. We do not yet have the exact date of the IPO, nor the final asking price for the new shares.

The young woman glances sideways as she scratches her head.

Image source: Getty Images.

All things considered, I see why many investors are excited about Roblox’s upcoming IPO, but I’m not getting in line to buy yet. In fact, I won’t seriously consider this stock until the hot launch cools down a bit. To see what I mean, consider the example set by DoorDash. The stock appeared on the market at $ 102 per share, rose to $ 190 on the first day, and traded at a much calmer $ 158. I don’t want to ride a roller coaster with Roblox.