Roblox Corporation (NYSE: RBLX) has been in the news this week. How can anyone ignore it when the news is full of headlines like “Roblox founder worth $4.6bn as shares soar“? The Roblox share price climbed 55% just in its first day’s trading.
The video game developer entered the market via what’s called a direct listing rather than the usual initial public offering (IPO). What’s the difference? With an IPO, a company issues new shares, underwritten usually by an investment bank, and offers them to the public. But with a direct listing, the existing owners sell some of their own shares, and there’s no underwritten new issue. A direct offering doesn’t provide the safety that an underwritten IPO offers. But against that, there are no underwriting fees.
Either way, I think the Roblox share price was always likely to perform well once the company came to market. It’s been on the cards for months, with many investors seriously keen to acquire a stake. I can see why.
Lockdown boost
For one thing, online gaming has taken off strongly during the various pandemic lockdowns around the world. Well, it was already popular anyway, but for millions stuck at home it’s been a great boon. Roblox doesn’t just produce and sell games. No, these days it’s all about creating the whole environment. So there are 3D environment tools (and it seems unfair to just call them ‘games’), being used by more than 8 million developers. That’s on top of the 37 million people playing the games. And there’s an in-world currency, Robux, which players can acquire by various means and use to buy and sell various in-game goodies.
All of that has created something of a virtuous circle, with the whole ecosystem attracting developers who attract players who attract developers… and so on. Can it do the same for the Roblox share price?
And would I buy Roblox shares? Well, I make it pretty much a rule to never buy at flotation, be it an IPO or this direct listing. That’s because I find it just about impossible to put a valuation on a firm until it’s had at least a few years of trading as a public company. What’s the best attempt I can make at putting a value on the Roblox share price?
Roblox share price valuation?
The company is forecasting revenue growth to $1.5bn in 2021. With a market cap of approximately $40bn, that suggests a price-to-sales ratio of around 27. When we don’t have a profit record to go on, a comparison to sales can be a useful measure. And that just seems too high to me.
The valuation might come down, of course. And it could look like good value if Roblox can maintain such impressive growth. But for me, I just don’t go for early growth stocks these days. I prefer to observe for a few years first — even though I think there’s a fair chance of the Roblox share price continuing to rise in the short term.