For two long months, we’ve been waiting for Roblox to IPO — and we’re probably going to have to wait just a little bit longer.
It was on Nov. 19, 2020, that the uber-popular online gaming hub Roblox filed plans with the SEC to IPO itself on the NYSE with the ticker symbol “RBLX.” About a month later, Roblox said it was suspending those plans temporarily, “to work with our advisors to see how we can make … improvements” to its market debut.
Earlier this month, Roblox finally came to a decision about how it would do that. First, on Jan. 6, the company conducted a private placement of stock, raising about $520 million in cash for itself. Then, two days later, Roblox amended its S-1 “going public” filing with the SEC. As the company advised, instead of conducting an ordinary “underwritten” IPO at a set offer price (the way most companies go public), Roblox will conduct a “direct listing” of its shares — offering them to the public at whatever price investors are willing to pay.
So how does this work, exactly?
What is a direct listing?
In an ordinary IPO, a company creates shares and sells them to the public to raise cash — and gets an accurate read on the value of its stock as a fringe benefit, “seeing” for the first time what people are really willing to pay for them on the public market. But Roblox is no ordinary company. It doesn’t actually need your money.
In fact, in its S-1 prospectus, Roblox advised that, as of the end of September 2020, it already had more than $800 million in cash in the bank. After collecting the proceeds from its private placement, you can probably up that estimate to $1.3 billion.
So instead of using its IPO to raise cash, sometime in “early February” Roblox will simply allow the people who currently own its shares to begin selling them to the public — at whatever price the market will bear. In total, 196.7 million “Class A” shares of Roblox may be up for grabs. Because these are existing shares being sold by people who already own them, though, Roblox itself “will not receive any proceeds from the sale.”
(Roblox has another set of shares, Class B shares, that are owned by its founder and CEO David Baszucki. These shares represent 70.7% of all votes at the company — and are not up for sale.)
So how much will it cost you to get one of the Class A shares that are for sale? The most recent known private sale of a Class A share of Roblox cost its buyer $6.34 a share — but that was back in April 2020, when the market was just starting to recover from the coronavirus stock market crash. In its prospectus, Roblox refers to an “independent common stock valuation report” that puts a price of $41.52 on the stock as of Dec. 31.
So really, it’s anybody’s guess what price this stock will start trading at.
How does a direct listing work in practice?
Ultimately, “the opening public price of our common stock on the NYSE will be determined by buy and sell orders collected by the NYSE from broker-dealers,” says Roblox, and will be set by a “designated market maker” working in consultation with Roblox‘s financial advisors Goldman Sachs and Morgan Stanley in the minutes before trading begins.
So how does that work in practice?
Well, let’s look at a recent example of the direct listing process: the direct listing IPO of Palantir (NYSE:PLTR) stock, which happened on the NYSE on Wednesday, Sept. 30, 2020. As luck would have it, our friends at TheFly.com were watching closely as this IPO went down, and reported how it unfolded “blow by blow”.
Investors’ first hint at how Palantir’s IPO might unfold came a week before the IPO, when The Wall Street Journal cited “people familiar with the matter” guesstimating Palantir would go public at about $10 a share. By IPO day, though, the NYSE was guessing that shares might start trading below that level, and so it set a “reference price” of just $7.25 per share.
As the minutes ticked down toward the first trade, NYSE stuck firmly by its $7.25 opinion, even as TheFly’s sources told it that the stock was actually “indicated to open” somewhere between $9.50 per share and $10.25. As the minutes continued to tick down, that range tightened as estimates got more and more accurate, first to a range of $9.90 to $10.10, and then $9.95 to $10.05.
Ultimately, when the first trade was recorded, it happened at precisely the price predicted by WSJ a week earlier — $10 a share on the nose.
How would I use this information if I were you? Within the next week or so, start scanning the Journal for a story stating the date of the expected IPO. Look closely at the price the paper says Roblox will begin trading at — because it’s more likely right than wrong. Then, when IPO Day arrives, ignore the “reference price” and focus instead on the “indicated to open” price.
Decide if that seems a fair price to you, and only buy if it does.