With Roblox joining the end-of-year unicorn stampede toward the public markets, we’re set for a contentedly busy second half of November and early December. I hope you didn’t have vacation planned in the next few weeks.
This morning we need to get deeper into the Roblox S-1 so we can better understand the nature of its revenue generation. Why? Because we want to start working on what the gaming company is worth; some comparisons are being made to Unity, another unicorn that went public earlier this year with a gaming focus.
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Should we apply Unity’s revenue multiple to Roblox? Or does the company deserve a slimmer multiple based on the substance of its revenue?
We’ll also have to remind ourselves how much capital Roblox last raised while private, and at what price. Given our historical knowledge of its financial results, we might be able to nail some valuations to revenue figures, helping us understand, roughly, how the venture capital community was valuing Roblox while it was private.
If you want an overview of just the numbers, Natasha and I wrote a digest here.
Now, let’s get to work.
What’s Roblox worth as a public company?
To get a foundation, let’s recall how Roblox was valued during its last private round. According to Crunchbase data, Roblox’s $150 million Series G was raised at a $3.9 billion pre-money valuation. So, Roblox was worth $4.05 billion after the February 2020 funding event.
Naturally there is a lag between when a deal is struck and when it is announced. So, let’s rewind the clock to Q4 2019 and ask ourselves what Roblox looked like at the time. From its S-1, here are the Q4 2019 numbers:
- Revenue of $138.3 million, +44.2% compared to the year-ago quarter
- A net loss of $39.6 million, +197.1% compared to the year-ago quarter
Annualizing that revenue figure, Roblox was on a $553.3 million run rate at around the time it raised that Series G. In revenue-multiple terms, Roblox was valued at 7.3x its top line on an annualized basis.
If you are a SaaS fan you are probably pretty shocked right now. Why the hell was Roblox, a software company, worth so little? Well let’s remind ourselves how it makes money:
We generate substantially all of our revenue through the sales of Robux to users. Users can spend Robux to purchase access to experiences, enhancements in experiences, and items in the Avatar Marketplace. Robux are available as one-time purchases or monthly subscriptions. We recognize revenue ratably over the estimated average lifetime of a paying user. […]
Other revenue streams include a minimal amount of revenue from advertising, licenses, and royalties.
That’s simple enough, and helpful.1
Roblox is a Robux business, selling the in-game currency in either discrete chunks, or on a subscription basis. Returning to our question as to why the gaming giant was not worth more at the time of its Series G, the mystery seems to deepen once we learn that the company does have some subscription revenues. That sounds like SaaS, right?
Not really. SaaS revenue tends to be both durable and likely to expand over time; I doubt that Roblox subscriptions share those traits. And, the company admits in its S-1 that “only a small portion of our users regularly purchase Robux through subscriptions and pay for experiences and virtual items compared to all users who use our platform in any period.” Subscriptions are hardly the main business.
As such, Roblox is an attractive company in many ways, but it’s not a software-as-a-service company. It’s a gaming company. And gaming companies have lower multiples than SaaS companies. Why? Because their revenue tends to be less durable than contracted software spend and usually falls over time instead of rising.
This brings us to the question of Unity, another gaming-focused company that went public recently. What’s it worth? According to Yahoo Finance, 44.37x its trailing 12 months’ revenue. Or, by our own math, 39.6x its most recent quarter’s revenue, annualized.
From a last-private-round multiple of 7.3x for Roblox, that Unity multiple appears to be atop a different mountain range altogether. But not all of the gap between Unity’s multiple and Roblox’s comes from differing revenue mechanics. Some of it is public market enthusiasm. So, we should anticipate that Roblox has a good shot at a higher multiple than it managed during its last private round.
After all, the public markets appear to be even more risk-on than the private world in 2020. So, how about 10x? That’s a nice number. And if we take the company’s most recent quarter’s revenue and annualize it, we get $968.8 million in top line. At our 10x multiple, Roblox would be worth just a hair under $10 billion.
By that modest mathmagic we can see that Roblox should not struggle to defend its last private valuation and will probably outscale it by a decent margin. Its “worth” will be formally set once it begins to trade. But we’ll know a lot more when it sets a first price range. More soon.
While writing this, Wish filed, and I took a quick look at its numbers here.
Wish files to go public with 100M monthly actives, $1.75B in 2020 revenue thus far
Footnotes:
1. For more on how Roblox counts revenue, we should understand how it handles bookings. Roblox counts gross sales of Robux as bookings, which are then recognized as revenue over the period of time the company expects a cohort’s lifetime to last.
Perhaps one of the most fascinating metrics, by the by, in the Roblox S-1 is how bullish its recent bookings appear:
From $458.0 million to $1.24 billion is impressive and could imply that Roblox has pre-sold quite a lot of growth for the next few quarters (the company’s “average lifetime for a paying user” has held steady at 23 months for some years).
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