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What’s the Fool’s “Under the Radar” Gaming Stock being teased by IPO Trailblazers?

What's the next "Radar" stock from the FAZER folks?

The Motley Fool sent out another internal tease in their Investor Digest this week, as a pitch to upsell their readers to Tom Gardner’s Discovery: IPO Trailblazers service ($1,999/yr, no refunds)… so, naturally, we wanna know what it is, right?

We’ve covered this IPO Trailblazers newsletter a few times — it was started as one of the “portfolio” services at the Fool a year or two ago, with Tom Gardner putting in a million dollars to bet on newly-public stocks that he thinks have at least 400% upside, and the marketing launch was well-timed because it happened to hit in late February of 2020, and started out with their “FAZER” stocks (what they called the “next FAANG”). Turns out, those were mostly smaller tech growth stocks that were perfect for the pandemic “work from home/play from home” tech boom and did fantastically well last year ( Are you getting our free Daily Update
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“It is so green, that it’s still not an official recommendation here at The Fool.

“It’s completely under-the-radar!

“Which is why we believe investors have a chance to learn all about this stock before most investors take notice.

“It is one of four radar stocks recently released in our Discovery: IPO Trailblazers portfolio (which has beaten the market by 2x)!”

So what’s the stock? The Thinkolator quickly confirmed that this is, as many of you will have probably guessed already, Roblox (RBLX), the video gaming platform that is hugely popular with children and did indeed go public, to quite a bit of fanfare, just a few months ago. That was a direct listing, not an IPO (which means they registered the shares for trading on the exchange, but did not create and sell new shares for that purpose or get the backing of an investment bank), and launched with what they called a “reference price” of $45 on their first day, but the actual trading began at about $65… and, yes, the shares did “jump 32% in May” as teased (though from the recent highs, they’ve now fallen about 10%).

Here’s how the company describes itself:

“Roblox’s mission is to build a human co-experience platform that enables billions of users to come together to play, learn, communicate, explore and expand their friendships.

“Roblox is powered by a global community of millions developers who produce their own immersive multiplayer experiences using Roblox Studio, our intuitive desktop design tool.

“Roblox is ranked as one of the top online entertainment platforms for audiences under the age of 18 based on average monthly visits and time spent (Comscore). Our popularity is driven purely by our community of users and developers.”

If you want to get a handle on Roblox as a business, their first quarterly Investor Letter is probably a good place to start (or the Investor Day presentation, if you want to make a much bigger time commitment). They are growing like mad, like pretty much every online entertainment outlet has during the pandemic, but they were growing pretty strongly before that, too. Probably the biggest challenge, at least in my mind, is whether they can age up and grow with their audience — more than half of their “engagement”, and presumably a large part of the revenue, still comes from kids under 13.

The financials look entirely ludicrous at first glance, since they’re losing money and trading at almost 50X trailing revenues… but while the company does absolutely trade at a premium valuation, it’s not really as bad as that. They make most of their money with their own closed payment system, where users buy their “Robux” currency and use that to buy games or make in-game purchases, with that money shared with the developer of the game, but that currency is treated kind of like a gift card: they get the cash up front, but it doesn’t get recognized as revenue until it’s used.

The company has a brilliant business model in a closed ecosystem, with much of the creative work and game development done by developers of individual projects… and as YouTube and so many other platforms have shown, harnessing the power of developers to generate creative content and sharing the sales and/or ad revenue with those developers can be a really great and hugely scalable business. I just don’t really have a handle on what the future looks like for Roblox.

There are several “platforms” and “game engines” that enable reasonably easy user creation of 3D, immersive video games, with Unity and Unreal probably the other two big ones that most people have heard of (Unreal is what powers Fortnite, and is owned by Epic Games, which is not publicly traded but does have Tencent as a 40% owner). Between Roblox and Unity, I confess that Unity Software’s (U) appeal is a little stronger for me, since I see it as having a wider addressable universe given their focus on non-gaming 3D immersive video… though there’s also something to be said for building something unique and more fully enclosed and more directly monetized like the Roblox ecosystem, instead of largely just selling software subscriptions like Unity (though Unity does also publish games for small developers and help them monetize those games through both advertising and sales, it’s not their only focus like it is for Roblox).

That initial preference I have might just be because I remember my kids being really into Roblox five or years ago, when it didn’t look at all impressive to me, and it’s probably locked in my brain as something less capable and more of a “kids only” platform than it really is (I didn’t “get” Minecraft either, and that remains insanely popular)… but today Roblox is roughly twice the size of Unity (and twice the “guessed” valuation of Epic Games, for that matter, though if Epic went public or if they win their big lawsuit with Apple that could easily change). And yes, Roblox is also growing faster than Unity, and has better margins… and that’s pretty impressive.

I expect I have a bit of a blindspot with Roblox — it is certainly expensive, it’s a premium-priced video game development platform and user-focused ecosystem, but it might still work out well for investors. There’s a bit of trepidation going around about most of the video gaming stocks these days, given fears that people will cut back on their gaming time now that the world is opening up and there are other things to do post-pandemic, and that might present us with buying opportunities in lots of gaming-related stocks as the next couple quarters roll through… but it does seem likely that gaming will continue to grow as an entertainment and social medium, and if Roblox can keep kids engaged in the platform as they become young adults, instead of watching them graduate to Fortnite and Call of Duty and Grand Theft Auto, perhaps they’ll continue to surprise us with huge revenue growth.

Right now, if you want to justify an investment in Roblox you’ll probably look first at the cash generation — they are not technically profitable, since those Robux that they sell in a given quarter sit on the books as a liability until they are spent, but they are generating quite a lot of cash from operations, and that will eventually trickle through as revenues and profits. Cash from operations in the first quarter, if you ignore the one-time costs associated with the direct listing, would have been about $216 million. The business grew at about 80% last year, which is probably not sustainable, that was a huge acceleration from 56% the previous year, driven by kids being stuck at home (and by lots of people having new time on their hands to develop new games)… but even 50% growth in 2019 was impressive.

Analysts are expecting growth to slow down considerably, with revenue growth of about 30% this year and 20% next year, and I expect that’s probably conservative, partly because nobody is really comfortable with RBLX yet and they don’t want to look foolish — but even if growth does slow to that degree, I’d estimate they could have $1 billion in cash flow from operations this year as long as kids don’t abandon video gaming and go play outside all summer. And while that’s not at all the same thing as ‘earnings,’ it’s still pretty impressive for a fast-growing $50 billion company… and it seems pretty likely that it’s going to reach a meaningful level of real profitability before Unity as well (analysts don’t see U being profitable before 2023, while RBLX will probably be profitable this year).

Looking just at the numbers, Roblox is a better and more impressive company than Unity in almost every way — more reasonably valued, growing faster, with a closed ecosystem and a ton of deferred revenue… I still think Unity is a more interesting growth story in the long term, largely because it has more appeal for real-time 3D commercial work and virtual reality applications, and I’m not entirely convinced that Roblox will remain relevant as its users age up, but I’m now thinking that I might be too cautious on that front. And clearly the sales growth is still strong — over at Amazon, the top four selling items in PC games (ie, non-console) are all Roblox Robux gift cards. They’re not above Xbox, Nintendo or Sony Playstation yet when it comes to video game sales overall on Amazon’s platform… but they’re awfully close — that doesn’t mean as much as it would have a few years ago, since so many purchase are made direct on platforms (including for Roblox) and not through retailers, and about half of Roblox revenue comes from the Apple and Google app stores (which means there’s also a big bite taken by those providers), but it’s a reminder that yes, even though I’m a little skeptical because I associate the platform with children, it’s a big business.

The big risks? Two are clear to me: That analysts might be too optimistic and Roblox sees an actual decline in revenue and engagement this year as schools reopen and kids go back to other social activities; and that over the longer term, Roblox fails to grow its user base beyond kids and teens or fails to capitalize on other potential growth areas, like advertising. There’s a lot of choice in the world of video games, and popular franchises and platforms tend to have good “network effect” power and keep people engaged… but there are plenty of examples of fads and washouts in this business, too.

The Motley Fool folks say this is a “radar” stock, which I guess means that they’re putting it on a watchlist, and that also makes sense to me — it could easily become much more appealing if it drops 50% in the next market crash, but after looking over that Robux deferred revenue and the rapid growth pre-pandemic, and the “seem too soft” analyst expectations, given my personal assumption that video gaming hours in general are likely to continue to grow from this new higher base and not dip or plateau over the next year or two… I decided to do a little more than watch.

Which means I’ll go in on this, but in a bit of a wishy-washy way. I bought Unity on its IPO day last year, the first time I had done that in years, and I’m willing to wait it out for a few years to see if their software platform develops into new commercial applications and builds its market share in gaming. With Roblox, I’m not willing to commit quite as much or be as patient, at least not yet, but the financials are significantly more impressive and the potential is clearly there, so I just bought some $120 call options for January of 2023 as a small speculation — If they can continue to build on that network effect of getting kids and creators more engaged, and the stock doubles in the next year and a half, that will work out well for me… if it doesn’t, I will have been better off owning the shares or staying out of it entirely. As always, I’ll be sure to update the Irregulars as my portfolio and thinking evolve.

That doesn’t really matter to you, though — that’s just what I’m doing with my money. When it comes to your money, it’s your opinion that should drive the bus… so what say ye? Ready to bet on a kids gaming platform? Think it’s a flash in the pan? Can you talk me into or out of this one? Let us know with a comment below… thanks for reading!

Disclosure: Of the stocks mentioned above, I own shares of and/or call options on Amazon, Alphabet, Fastly, Roku, Unity Software, and now Roblox. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules (and since this is a new options stake in Roblox, and those can be very volatile if they get any attention, I’ll commit to not trade that position for at least a month).

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Johnny LaRue
Member
Johnny LaRue
June 8, 2021 1:53 pm

Basing this on the kids i know Roblox is popular with the 12 and under crowd. 13 and above (boys) love Call of Duty. I don’t think Roblox is a flash in the pan but they have to retain current players as they age or get new players.

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thedarkhalf
Member
thedarkhalf
June 8, 2021 7:38 pm

My son is 16 and him and his buddies played it a lot. Or at least they did for like a month or 2. It seems to have faded out of his play list now. When I saw it listed on the Fool, I asked him about it and he showed it to me. It was very interesting that you can create games and all of the games people have created, but seems very amateurish to me. Might be good for the younger crowd and the fact that you can play it on a potato means a lot of kids have access to it. I passed on buying some, but maybe will look into it if it dips.

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kapphx
June 8, 2021 2:02 pm

RBLX seems to be a popular pick lately. Both Luke Lango at InvestorPlace (in mid-May)and Paul Mampilly in his Profits Unlimited service (early June) have recently recommended.

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James
Member
James
June 9, 2021 12:09 pm
Reply to  kapphx

Indeed. Glad I got it from the $50/year Profits Unlimited newsletter rather than the Fools $2000/year newsletter!
But then we could also have got it from Stockgumshoe for free!

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Justify
Irregular
June 20, 2021 9:21 pm
Reply to  James

I belong to MF One and 2 of their “subscriptions” ; Roku has been a “buy” for years. I have to say I am very disappointed with MF; I joined Rising Stars which was advertised as a “12 bagger ” program , but when I opened the purchase it said : 6 bagger. Wrote to MF and c/o false advertising. No refund.

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usasingh1
usasingh1
June 8, 2021 2:35 pm

AMZN NOvember 3600 Call strike at 116.00 . I bought one day on hope of 1-10 split . If AMZN hits 4000 i make 900% or I lose 100%. Do u think its a good trade Sir?

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timcoahran
Irregular
June 8, 2021 4:29 pm

I had that same thought on his space flight, too!

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benrushmd
Member
benrushmd
June 12, 2021 1:11 pm

Many in Govt are eyeing a split – more than just a stock split

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timcoahran
Irregular
June 8, 2021 4:45 pm
Reply to  usasingh1

I’m trying to imagine what it would be like if an AMZN option actually got exercised! (instead of just re-sold early).
3.6 x 10^5 … That would put position-sizing outside of my bracket!

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think_theta_positive
June 9, 2021 4:43 am
Reply to  usasingh1

Can you explain where the 900% comes from? Imagine AMZN hits 4000 on expiration day, then your 3600C will be worth 400 (x100). You paid 116 (x100). That is nowhere near a 900% gain. I hope you don’t think that the stock split of 10 to 1 itself will affect your options trade. Because that is not going to happen. On such an event, option contracts are modified to nullify the effect of the corporate action. It is called ‘ being made whole’. You can google it.

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usasingh1
usasingh1
June 9, 2021 8:48 pm

so If i have one call and hypothetically AMZN splits 1-10 I may have 10 calls then strike 360 at 11.60 each . I will make only 28.40 on each call if it hits 400 but I can make 900% only if it hits 450 . I am sorry for miscalculation. Thank you Sir for opening my eyes.

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think_theta_positive
June 10, 2021 4:56 am
Reply to  usasingh1

Indeed. To find the correct strike that yields 900%, you need to solve ((x-360)-11.6)/11.6=9 for x, which is 476. Of course, this result only holds on expiration day, when all time premium in your call option has evaporated.

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stoker
stoker
June 8, 2021 5:13 pm

I was driving my granddaughter (13) to a summer art camp this morning and she was talking about Roblox. I never heard about it before lol

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aoraccounts
aoraccounts
June 8, 2021 5:53 pm

Whenever Travis does a Motley Fool teaser, I always check the Motley website to see if the stock has been voted on by Motley members. If it has, I figure that Motley has recommended it in one of the many subscriptions that I don’t have. [I just have the standard one.] Regarding RBLX, Motley members have voted on it and 96% of them think it will beat the market.

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timcoahran
Irregular
June 8, 2021 5:57 pm
Reply to  aoraccounts

That’s a clever idea – to get another glimpse around their various curtains.

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ronwill
June 8, 2021 8:08 pm

They had a May 28th article with 4 radar stocks listed. Interestingly enough one of them, Coupang, is a recommended stock in another service of theirs.

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Doug Sherard
Guest
Doug Sherard
June 8, 2021 9:45 pm

Could ir be Skillz (SKLZ) I think they have recommended it a few times in Stock Advisor.

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eleanor
eleanor
June 8, 2021 10:35 pm

Travis, just curious why you think sklz is terrible.

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ghaggarty
ghaggarty
June 9, 2021 9:08 pm

Travis, ibid Eleanor’s inquiry. Please share your thoughts. Thank you.

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Cabron
Cabron
June 9, 2021 12:52 am

“An estimated 244 million people in the U.S. play video games daily!”

I guess I’m in the small minority that doesn’t. US population is around 330 million. Now that means 73% are playing video games. That makes me kind of worried for my country 🙂

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timcoahran
Irregular
June 9, 2021 4:12 pm
Reply to  Cabron

I tried a cpl once. Seemed kind’a boring. About as good as television.
Our country would be better off if someone would go climb a mountain, instead!

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eleanor
eleanor
June 9, 2021 6:01 pm
Reply to  timcoahran

Totally agree.

270jap
Irregular
June 12, 2021 10:37 am
Reply to  Cabron

You’re only in a small minority if that stat is indeed true. Color me skeptical.

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rogue poet
Member
rogue poet
July 11, 2021 11:20 pm
Reply to  Cabron

Bingo.

We should all be worried about our country.

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Cabron
Cabron
June 9, 2021 1:18 am

RBLX is popular with the WallStreetBets crowd, so I wouldn’t be surprised if they try to run that one up soon. They’ve run up several in the past couple weeks.

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victory
Member
June 9, 2021 2:51 am

i bought Roblox on the recommendation of my 10 year old who said all she and her friends spend all their screen time playing Roblox,
and they all buy Robux (the Roblox dollars) when they get monetary gifts from their relatives
when she heard that there is a stock that is from her favourite games she told me to buy it
so i figured why not
got in at 70+ felt it was expensive then saw it go all the way to 100+
maybe we should listen to our kids and grandkids they are the ones
taking over the world and so much more internet savvy
growing up in a very different world than we did
anyways that is my opinion what do you all think
i bought Disney too on my grandchildrens recommendation

bulusu
bulusu
June 9, 2021 3:26 pm
Reply to  victory

LOL — I saw my kids talk about this all the time and paid some $ through App Store for virtual gifts in the game.. Figured I will put some $$$$ in this stock around $65 and did pretty well so far.

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mcarey
June 10, 2021 8:41 pm

Motley Fool co-founder and CEO Tom Gardner just added TWO new positions to our Discovery: 10X Portfolio

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mcarey
June 10, 2021 8:42 pm
Reply to  mcarey

Not sure what they are yet.

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benrushmd
Member
benrushmd
June 12, 2021 1:06 pm

You’ve forgotten one thing about RBLX – the present users are growing, the gaming will grow with them and as it does, will attract even more users while still catering to new younger users. Finally, the growth may be generational in this regard – a possible multi-generational growth story. Thoughts?

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Joanne M
Member
Joanne M
June 13, 2021 1:19 am

New digital video business not yet ipo’d that uses blockchain tech for commerce/transactions.
Teeka advertisement/sales pitch. Would love to know how to get in on this pre ipo. Don’t know what it is

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Marsha McCroden
Member
Marsha McCroden
June 14, 2021 2:44 am

I’m trying to invest in the future, but have no idea what stocks are good stocks to buy. Can the Thinkolator help me? I’m looking at ChargePoint (CHPT), Sila Nanotechnology (which keeps saying it’s going to go public), Nano Diamond Battery (NDB) and CLII. Of all these, only ChargePoint has gone public yet, although CLII is in the shareholder voting stage.

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lalgulab12
June 14, 2021 9:41 am

Your thoughts on PHYNERIA and FUJI pigment company on ev batteries. I see aluminum / air batteries as the future .

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joe
Guest
joe
June 29, 2021 7:40 am

My guess is ESTC. Revenue and market cap (less than 1/2 of DDOG, 1/14 the size of SHOP) closely match.

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