Roblox's Stunning Debut Has a Big Downside

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Roblox Corp. — the video-game platform that has addicted the Gen Z crowd, enabling millions of users to easily create virtual world experiences and sell digital items to dress up their characters — had a stunning stock-market debut. Its shares soared on its first day of trading Wednesday, giving the pop-culture sensation a valuation of almost $50 billion, a figure far above what the company hoped for just a few months ago. As bright as its outlook is, though, that’s too much too soon. 

When Roblox initially filed to go public last fall, it reportedly targeted a valuation of $8 billion. At the time, I wrote positively about its prospects as the dominant gaming platform for kids and how it was well positioned to win the “metaverse” opportunity — where gamers can play, socialize and interact with one another in a virtual universe. I still feel that way. But a roughly six-factor increase in value in a matter of months seems overly enthusiastic.

First, Roblox’s growth rate will slow significantly this year as pandemic restrictions ease and kids spend more time outdoors again. The company said last week that it expects full-year bookings growth, a measure of sales, to rise 6% to 13% for 2021 compared with 171% last year. Even if Roblox can materially beat its forecast, its valuation arguably already reflects expectations for the best-case scenario. To illustrate, rival Activision Blizzard Inc. trades at 33 times its 2020 free cash flow, while Roblox trades at 111 times.

There also is concentration risk. Roblox’s business is highly dependent on the mobile app stores owned by Apple Inc. and Alphabet Inc.’s Google. In its last filing, the company revealed that the Apple App Store represented 35% of its revenue last year, while 19% came from the Google Play Store. Further, nearly 70% of time spent on its platform came from players that signed up from those two mobile platforms. Some analysts have wondered why Roblox is allowed to offer different games through its app without each title being approved case by case by Apple. The technology giant rejected attempts by Facebook Inc. and Microsoft Corp. to offer similar multititle offerings for their gaming apps. If Apple or Google changed content the policy in regards to Roblox, it would represent a big setback.

It has been quite a run for Roblox’s insiders. In February 2020, the company raised a round of private funding at $4 billion. Then earlier this year, it was able to raise $520 million at a $29.5 billion valuation. As of Wednesday’s late-afternoon trading price of $70, the company’s valuation stood at about $45 billion. Yes, I still believe Roblox has a bright future and many years of growth ahead. But investors are getting ahead of themselves.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tae Kim is a Bloomberg Opinion columnist covering technology. He previously covered technology for Barron's, following an earlier career as an equity analyst.

©2021 Bloomberg L.P.

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