Everything you need to know about the Roblox direct listing

What Does Roblox Do? 

Many of the core Roblox experiences are free, but the virtual currency, Robux, can be used to customize player avatars, unlock premium games and purchase in-game perks. Roblox makes money by charging users for Robux and through its subscription service, Roblox Premium, which offers discounts and access to exclusive content. Developers keep a portion of the Robux generated through their games, and can cash out through the Developer Exchange Program.

An active Roblox developer community means content is always changing. On my homepage, for instance, Roblox gives me the option to play a tower defense game, flight simulator, freeze tag simulator, a pet game reminiscent of Nintendogs and a weight-lifting simulator. Developers have created more than 18 million games/experiences for the Roblox platform, though users tend to gravitate to a much smaller subset of the available content. Flexibility in gameplay is critical to Roblox's long-term value proposition, since it hopes to avoid the boom-and-bust cycle of a typical standalone game.

If you feel old reading any of the above, it's probably because over half of Roblox users were born after 2006. But what the community lacks in life experience, it makes up for with enthusiasm: Roblox users spent a total of 22.2 billion hours on the platform for the nine months ended Sept. 30, 2020, which comes out to 2.6 hours per day for each active user. With children locked out of other social activities during the pandemic, Roblox experienced a massive uptick in usage; total time spent on the platform doubled between February and July 2020.

Roblox's Financials 

Roblox isn't yet profitable, but it has managed to grow revenue at an impressive clip. According to the company's amended S-1, Roblox generated $614 million in revenue for the nine months ended Sept. 30, 2020, representing a 70% jump from the same period in 2019. Costs grew even faster than revenue, however, so Roblox posted a $197 million consolidated net loss in the 2020 period, down from the $38 million consolidated net loss in the first nine months of 2019.

Roblox's highest expense is developer exchange fees, which accounted for roughly 27% of total expenses in the first nine months of 2020. Other significant costs include server fees, consumer safety (Roblox contracts out some 1,700 agents to monitor its platform to uphold community standards), research and development investment and the 30% fee owed to Apple and Google for mobile OS purchases.

What Could Go Wrong?

Three themes stand out from Roblox's S-1: loss of user interest, access to distribution channels and user safety.

Children's attention is notoriously fickle, and Roblox is asking investors to bet billions on its ability to remain relevant for years to come. For every Lego or Nintendo that has defined multiple generations of childhoods, there's a Club Penguin, Neopets or Webkinz that quickly went from all the rage to irrelevant.

• "The multitude of other entertainment options, online gaming, and other interactive experiences is high, making it difficult to retain users who are dissatisfied with our platform and seek other entertainment options," Roblox writes. "Moreover, the majority of our users are under the age of 13. This demographic may be less brand loyal and more likely to follow trends, including viral trends, than other demographics."
• Another concern is that Roblox won't be able to sustain its boost in user activity after the pandemic subsides. The company writes: "The COVID-19 pandemic and resulting social distancing, shelter-in-place and similar restrictions led to increased developer and creator and user engagement on our platform relative to our quarterly forecast and historic trends. These increases in user activity are almost certainly not indicative of our financial and operating results in future periods."

Roblox's access to distribution channels is contingent upon external partnerships.

• In December 2020, Roblox gained approval to operate in China through a joint venture with Tencent. This could be an enormous revenue opportunity, but it comes with uncertainty given the tense relations between the U.S. and China.
• Apple and Google also have significant leverage over Roblox. "For the nine months ended September 30, 2020, 34% of our revenue was attributable to Robux sales through the Apple App Store and 18% of our revenue was attributable to Robux sales through the Google Play Store, and during the same period 68% of our engagement hours on the platform were from users who signed up through the Apple App Store and Google Play Store," the company writes. Roblox raises the possibility that Apple or Google could damage their profitability by changing fee structures or data policies.

Roblox needs to uphold high safety standards since so many children are on the platform; failing to do so would damage their reputation.

• The company writes: "We have faced allegations that our platform has been used by criminal offenders to identify and communicate with children and to possibly entice them to interact off-platform, outside of the restrictions of our chat, content blockers, and other on-platform safety measures. While we devote considerable resources to prevent this from occurring, we are unable to prevent all such interactions from taking place."
• Roblox also brings up the possibility that developers make content that the community considers "illicit, explicit, profane, or otherwise objectionable." The company bans such content, but with millions of experiences available, some could slip through the cracks.

Who Gets Rich?

Investors in Roblox saw the company's valuation grow seven times over the past year. In February 2020, Roblox raised $150 million in a series G round that valued it at $4 billion. Then in January 2021, Roblox closed a $520 million series H round that generated an astounding $29.5 billion valuation.

This valuation may seem absurd to some. Is a children's video game (OK, "platform") worth nearly as much as Ford? Whether Roblox can justify its valuation in the long run, here's who stands to gain from a stellar IPO, based on shareholder disclosures from the S-1 filing on Nov. 19, 2020:

• Altos Ventures owned 21% of shares.
• Meritech Capital owned 10% of shares.
• Roblox founder, president and CEO David Baszucki owned 12% of outstanding shares.
• Index Ventures owned 9.9% of shares.

What People Are Saying

"The S-1 makes plain exactly how big Roblox's ambitions are: It's trying to build an entire new world, with a new economy, a new currency, a new everything, and not just for kids. The company wants to be thought of like a tech giant, not a game developer." —Protocol's David Pierce wrote in Source Code after Roblox filed its S-1.

"Roblox could be to Facebook what Shopify is to Amazon, the non-social media social media firm. Just as hospitals, doctors offices, headquarters, shopping malls, and campuses are being bypassed and shifting hundreds of billions in stakeholder value, Roblox could disrupt the kid attention economy. Roblox is set to go public this month, and will create meaningful shareholder value. Prediction: stock trades up 70% or more on first trade. More important, Roblox could be the first social media firm whose shareholder value isn't designed to extract value from the least powerful stakeholder, kids." —NYU Professor Scott Galloway in his No Mercy / No Malice newsletter.