The NYSE originally set a reference price of $45, but shares quickly shot up 54.4% to end their first day of trading at $69.50. The stock gained another 6.3% to close with a bang at $73.90 the following day.
A direct listing means that no new shares were created or sold in the process of going public, allowing both buying and selling of the stock to commence freely. The advantages of a direct listing include not having to pay underwriters or dilute existing shares. Overall, it is a less expensive option than an IPO, with the catch that there is no "safety net" to ensure that shares sell. A direct listing thus implies high confidence from management that the stock will quickly gain ground after going public.
This certainly seems to be the case in the stock's first few days of trading as investors assert their confidence in the company's product and growth strategy. One of the gurus followed by GuruFocus, Catherine Wood (Trades, Portfolio), already initiated a position in the stock on Tuesday for one of ARK Invest's exchange-traded funds.
In 2020, Roblox's video game platform, which is available on phones, tablets and consoles, surpassed Candy Crush as the highest-grossing mobile game of the year in terms of revenue.
Its namesake game, which is free to download, provides a customizable virtual universe where players create their own avatars and environments. Leaning heavily on the community aspect, it allows players to create their own virtual worlds and visit other players' worlds to chat, role-play or create their own adventures.
The company generates revenue from the sale of its in-game currency called Robux, which customers can use to purchase virtual game objects to improve their gaming experience.
At the end of 2020, the company had 32.6 million daily active users, most of which were children 13 and under. Up to this point in the company's lifetime, its product has been geared toward this younger audience, which it has found easier to entertain.
Expected growth drivers and obstacles
Going forward, CEO David Baszucki says the company's ongoing development is making it appeal more to older audiences such as the 17- to 24-year-old range. He said the group of older users is growing, and someday the majority of the company's income will come from players above the age of children and tweens.
One thing the company did note in paperwork with the Securities and Exchanges Commission was that the growing popularity of microtransaction-based revenue streams such as the one it utilizes could bring it under increased scrutiny. Both the company's revenue model and its young user base have yet to face much regulatory scrutiny, which could change in the near future:
"The increased use of interactive entertainment offerings like ours by consumers, including younger consumers, may prompt calls for more stringent consumer protection laws and regulations that may impose additional burdens on companies such as ours."
Currently, microtransactions are extremely lucrative for many reasons. For one, there is no limit on how much money customers can spend on such games; the more money they spend, the more in-game items they get. Additionally, these kinds of games get the user hooked on their interactive platforms, game features and the community aspect so that the more time they spend on the game, the more money they are willing to spend on it, since they perceive the game as being worth more.
Thus, in addition to the normal maintenance of privacy policies, Roblox needs to account more for things such as a safe play environment for children and measures to ensure that younger users are not spending too much of their parents' money on the game.
In terms of regulatory issues, microtransactions are currently legal, and Roblox's main market, the U.S., has not made any significant moves to limit them. In 2019, a senator introduced a bill to Congress that would ban micro-transactions by minors, but the bill has gone nowhere since then.
As the platform appeals more and more to a broader audience, the danger posed by potential future regulations will decline as any new laws are not as likely to limit the spending of adults. Moreover, all of the company's competitors would face the same regulation if any were imposed, virtually eliminating concerns of losing market share. The main downside from an investor perspective would be that new regulation would likely cause the stock price to tank.
One of the gurus followed by GuruFocus, Woods, bought over 500,000 shares of Roblox for the ARK Next Generation Internet ETF (ARKW), giving it a 0.47% weight in the ETF. At Wednesday's closing price, the holding was worth $36 million.
Founded in 2014, Ark Investment Management, commonly known as Ark Invest, specializes in thematic investing in disruptive innovation. Its goal is to achieve capital appreciation through holdings in companies that demonstrate strong growth and are transforming the industries in which they operate, with the belief that innovation is the key to growth.
As of the end of the fourth quarter of 2020, Ark Invest's top holdings were Tesla Inc. (TSLA, Financial) with 7.76% of the equity portfolio, Roku Inc. (ROKU, Financial) with 4.75% and CRISPR Therapeutics AG (CRSP, Financial) with 4.24%.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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