Roblox (NYSE:RBLX) just completed its IPO, and the share price skyrocketed. The gaming stock was listed at an issue price of $45, which has quickly grown by 70% to nearly $77 today. 

What does this new business do? And should I be adding the stock to my growth portfolio? Let’s take a look.

A massively popular multi-player gaming platform

Roblox is a gaming company. And shares the same name as its core title – Roblox the game. It was released nearly 17 years ago in 2004. And over that time period, it has successfully expanded and attracted over 31 million daily active users today. That’s quite impressive, in my opinion.

How did it achieve such an impressive feat? Typically a game only has a finite amount of content. Consequently, the vast majority of players usually switch to new titles within a few years. However, what makes Roblox so unique is that there is a continuous stream of new content being added by the players.

The game is essentially a sandbox. Players can go in and have fun with the contents. But they can also use the large suite of tools to design and create and share their own experiences without needing any advanced programming or game design knowledge. Therefore new content is added almost every day by the players, while all Roblox has to do, is cover server costs and maintain its development tools.

This approach has also generated a network effect. New players are attracted to the platform due to its vast content library. Some of these players may decide to create their own mini-game to play amongst friends. And after publishing it, the content library of Roblox grows. Thus offering even more experiences that attract even more players.

Some risks to consider

As promising as this business sounds, there are some significant risks. Primarily how the firm makes money. Roblox is a free-to-play game that has micro-transactions. Players can choose to spend money to purchase in-game currency that unlocks additional premium content. 

However, this is entirely optional, and so many players may never contribute a single penny. Meanwhile, Roblox still has to cover the server costs even for non-paying players. Even today, with its vast player base, the company is not generating sufficient revenue to cover its operational expenses. And consequently, it is unprofitable with no clear guidance as to when that might change.

Another risk to consider is the player-base. The vast majority of players are children, subjecting the game to additional legislation to protect this younger audience. Suppose the firm were to unintentionally breach these regulations. In that case, it could have significant fiscal and reputational damage to Roblox and its share price.

The Roblox share price: time to buy?

By turning the players into content creators, Roblox has built up a wide economic moat that most video game developers don’t have. This is a very attractive property for a business to have, in my opinion.

However, as promising as it sounds, the Roblox share price simply looks too high to me. The company currently has a market capitalisation of $42.4bn. Comparing that to its 2020 nine-month revenue of $589m gives a price to sales ratio of 72. And so, I won’t be adding the stock to my portfolio today.

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