Triple Digit Return Possible as Roblox Nears Initial Public Offering Debut

Gaming Stocks, IPO, Options
Reading Time: 3 minutes

Shares of Roblox (RBLX) have been in a recent downtrend and the stock could fall below its mid-March debut on continued weakness. The video game company opened at $64.50 per share on March 10 after its direct listing reference price was set at $45.

Founded in 2004, Roblox is the maker of a platform that allow user to program, build, and play games created by other users, all coded in Lua programming language. The company released its platform in 2006.

Even though RBLX has been available for over a decade, it only began to enter the mainstream in the last few years. It has seen its monthly active users increase from 35 to more than 165 million in three years, with 50 million of those added during the coronavirus pandemic.

Roblox is free to play, with in-game purchases available through a virtual currency called “Robux.” The latest information estimates RBLX has more than 164 million monthly active users, with 33 million using the platform daily.

The company generated $920 million revenue in 2020, a 110% year-on-year increase, while paying $250 million to developers as part of its Developer Exchange program. However, net losses grew from $50 million in 2019 to $206 million in 2020.

There is little analyst coverage on Wall Street, with current quarter estimates looking for a profit from $0.02 to $0.21 on revenue of $504 million, on average. It will be interesting to see if RBLX actually reports a profit, as its average revenue per daily active user (ARPDAU) is about $0.05, versus $0.10 for casual games on the Apple App Store.

Another warning flag is that RBLX users have around a two-year lifespan, much shorter than some other major gaming brands. Roblox is suited for kids under 13, and the company will continually need to refill its active user pool—a big challenge going forward, as kids grow up fast.

The chart below shows key support is in the $62.50–$60 range, with a close below the latter leading to a deeper selloff. Resistance is at $67.50-$70, with a move above the latter likely signaling a possible near-term bottom.

RBLX is a very popular gaming platform for young kids, and there’s a good social aspect to it; however, given the uncertainty and constant challenges in the gaming industry, there seems to be more risk than reward at current price levels.

If shares do fall below $60, there is no clear bottom in sight for the stock. Traders looking to go short on the stock can wait to see if this level cracks in the coming weeks.

Options are also available to trade on RBLX and are a cheaper way to play a pending selloff. It also offsets the risk of covering a short position if there is a continued selloff in the stock. For example, the RBLX June 55 puts are currently trading for $2. If shares were to fall below $51 by June 18, these options would be $4 in the money for a triple-digit return.

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