Roblox, the gaming giant, filed their S-1 last week, and it’s our pick for the year’s most anticipated IPO. Roblox is a compelling narrative in and of itself, but the impact of Work From Home (WFH) raises the stakes in both good and terrible ways (but mostly good).

Roblox is the trendiest game among the Under-12 Set, even if you don’t have any pre-teens in your house. Roblox is a game platform that uses basic, block-like graphics (like Minecraft). Developers can create games that run inside the Roblox app, with a low bar to meet in order to get that title. Players can then choose the games they want to play. And the number of games on the platform is staggering: there are currently 18 million games (or “experiences” in the company’s parlance) available.

Gameplay is relatively straightforward, yet there are recurring design elements and UI mechanics. The company makes money by selling in-game currency that may be used to customize avatars and other products. Here, check the most famous roblox song ids.

But, man, how does it make money? Every day, 36 million users play Roblox, according to the S-1. Players who aren’t ready (or allowed) to play AAA games like Call of Duty or League of Legends will enjoy the simple mechanics and generally kid-friendly aesthetics. Simply put, Roblox has become the go-to destination for Screen Time in many households, as we can personally attest.

This is one of the few recent IPOs whose financial statements reflect the level of interest in the firm. In 2019, Roblox made $488 million in revenue, while in the first nine months of 2020, the firm made $588 million. With the lockdown keeping students “studying” indoors, they have witnessed an increase in usage this year.

But, wait, aren’t they in the red? The company lost $91 million in 2019 and $206 million in the first nine months of 2020 on a strictly accounting basis. This, however, is a clerical error. When a corporation records revenue (for example, when a client purchases in-game currency with real-world dollars), it must account for that money over the consumer’s “lifetime value.” This is entirely a fictitious account. We understand why it’s important to factor in the expense of something over the course of the desired service. This treatment, however, substantially distorts the actual business. We get a figure called “bookings” when we add back the amount of money that is being kept to be accounted for over multiple years (i.e. delayed revenue). We are usually skeptics of non-GAAP metrics, but this one appears to be justified. On this approach, the company booked $694 million in 2019 and $1.2 billion in the first nine months of 2020, with $99 million and $345 million in cash from operations, respectively.

We understand the reasoning for why the corporation would need to use this deferred revenue in theory. Deferring a portion of the revenue from a telecom equipment contract if there are specific milestones and deliverables during the life of the equipment (e.g. servicing and maintenance) makes sense. This hypothesis falls apart when dealing with in-game currency that is spent as soon as it is purchased.

Following the bookings figures makes a lot more sense to us.

The corporation does, admittedly, have some significant expenses. The first is the compensation it provides to its developers. These generally account for 20 percent of revenue, but with all the extra activity this year, they’ve risen to 36 percent. The corporation must also pay a significant amount of money to host all of those games, with another 30% going to infrastructure and security (read moderating to keep content kid-friendly). Payment processing fees are another significant expense; Apple, Google, and other payment processors take a share of roughly 25% of revenue. This is a costly firm to run, but the great majority of its expenses are variable costs that increase as the company grows.

The company faces certain difficulties, especially given that it will most likely be valued at a premium.

The first issue is one of geography. The United States and Canada account for little about 70% of the company’s sales. Surprisingly, they point out that just 33% of consumers fall into this category. This is one of those half-glasses-of-water situations. We could say that they are under-monetizing outside of the US, but we could also argue that this is simply a huge opportunity for them to raise their numbers as their monetization in other regions improves.

The user base is also youthful, with 54 percent of users under the age of 12 and 67 percent under the age of 16. As a result, one may say that the user base is maturing and moving on to older games. This is, on the other hand, a very desired population. The corporation will have many years to maneuver and hold onto the audience as long as they can maintain safety and privacy standards (a difficult task, but so far so well). They say that broadening their user base’s age range is a significant strategic goal, which has led to investments in better graphics and gameplay. So there’s a case to be made that they’ll be able to keep a large number of people for a long period.

And then there’s the Metaverse. The idea of creating a new “place” for people to spend time is a common one among gaming firms nowadays. The metaverse is more than just a game; it’s also a popular hangout spot. As a result, we’re seeing virtual concerts featuring musicians and other celebrities hosted by firms like Roblox and Fortnite. We believe that this was already proven to be a viable option before to the shutdown, and that its popularity has only grown since then.