Roblox Corporation (RBLX) intends to raise $1 billion in an IPO of its Class A common stock, according to an S-1 registration statement.

San Mateo, California-based Roblox was founded in 2004 to create a place for consumers to create, play and interact with others in an online 3D environment.

Management is headed by founder, president and CEO David Baszucki, who previously held various roles at Knowledge Revolution.

Below is a brief overview video of Roblox' official 2020 trailer:

Source: Roblox

The company’s primary offerings include:

  • Reality Engine
  • Universal Game Client
  • Real-Time Social Platform
  • Compute Cloud
  • Team Development Infrastructure

Roblox has received at least $500 million from investors including Altos Ventures, First Round Capital, Index Ventures, Meritech Capital and Tiger Global Management.

The firm acquires new users through major app stores and through online media, word of mouth and earned marketing.

RBLX pays the 30% percentage fee to major app stores as a large developer, although this amount may be under downward pressure in the future.

Sales and Marketing expenses as a percentage of total revenue have been dropping as revenues have increased.

The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, rose sharply to 5.7x in the most recent reporting period.

According to a 2020 market research report by Grand View Research, the global market for virtual reality activities was an estimated $10.3 billion in 2019 and is expected to reach $49.3 billion by 2027.

This represents an extremely high forecast CAGR of 21.6% from 2020 to 2027.

The main drivers for this expected growth are large investment in improved technologies by industry participants and increased demand for simulated environments by consumers and business users.

Also, the technology has extensive use cases in education contexts, including medical and transportation training.

Below is a breakdown of the relative market sizes in 2019:

robloxmkt

Major competitive or other industry participants include:

  • Amazon (AMZN)
  • Apple (AAPL)
  • Microsoft (MSFT)
  • Comcast (CMCSA)
  • Activision Blizzard (ATVI)
  • Electronic Arts (EA)
  • Take-Two (TTWO)
  • Valve
  • Unity Software (U)
  • Zynga (ZNGA)
  • Online Content Platforms

Roblox’s recent financial results can be summarized as follows:

  • Growing topline revenue, at an accelerating rate of growth
  • Increasing gross profit but decreased gross margin
  • Higher operating losses
  • Sharply increased cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

robloxpl

Source: Company registration statement

As of September 30, 2020, Roblox had $801.6 million in cash and $1.4 billion in total liabilities.

Free cash flow during the twelve months ended September 30, 2020, was $301.1 million.

Roblox intends to raise $1 billion in gross proceeds from an IPO of its Class A common stock, although the final figure may vary.

Class A common stockholders will be entitled to one vote per share and Class B holders, affiliates of the founder, will be entitled to 20 votes per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Management says it will use the net proceeds from the IPO as follows:

We intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. Additionally, we may use a portion of the net proceeds we receive from this offering to acquire or invest in businesses, products, services, or technologies.

Management’s presentation of the company roadshow is not yet available.

Listed bookrunners of the IPO are Goldman Sachs, Morgan Stanley, J.P. Morgan, Allen & Company, BofA Securities and RBC Capital Markets.

Commentary

Roblox is seeking public investment to fund its growth and expansion initiatives.

The firm’s financials show impressive and accelerating topline revenue growth, along with increasing gross profit but also high operating losses.

Sales and Marketing expenses as a percentage of total revenue have been dropping; its Sales and Marketing efficiency rate has risen markedly, with both results indicating sharply increased capital efficiency in the user acquisition function.

DAUs, or Daily Active Users, grew by 47% in 2019 over 2018, and grew by 82% in the first nine months of 2020, to 17.1 million.

The market opportunity for virtual immersive experiences is expected to produce very high growth over the coming years, but there is and will be significant major competition as the industry matures.

Taking advantage of that growth potential will likely require significant capital resources, hence the IPO for comparatively small Roblox as it seeks to bulk up against major competitors.

Goldman Sachs is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 79.5% since their IPO. This is a top-tier performance for all major underwriters during the period.

The firm has produced impressive growth across financial metrics, user generated content and bookings.

When we learn management’s assumptions on IPO pricing and valuation, I’ll provide an update.

Expected IPO Pricing Date: To be announced.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice. Past performance is no guarantee of future results.)

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