The global gaming space has been heating up over the years. The number of players has grown at an exponential rate driven by the shift towards digital gaming as well the smartphone revolution.
Companies in this industry were also one of the few to benefit from the COVID-19 pandemic. As people were largely confined to their homes and entertainment options were limited, the pandemic acted as a tailwind that saw gaming companies experience strong revenue growth as well as an uptick in daily and monthly active users.
Here, we analyze two recent gaming IPOs- Roblox (RBLX) and Unity Software (U) to see which is a better buy right now.
Roblox
Roblox went public last week and priced its IPO at $45 per share. It began trading on March 10 at $64.50 and ended the day at $69.50, which meant it returned over 50% for IPO investors in a single trading session. Roblox stock is currently trading at $77.80 on last look.
This gaming company aims to build a robust platform where users can play, learn and communicate. It ended 2020 with 32.6 million DAUs (daily active users), up from just 12 million in 2018 and 17.6 million in 2019. Further, it generated $924 million in sales and close to $2 billion bookings. While Roblox posted a net loss of $253 million in 2020, it also generated $524 million in operating cash flow.
Users engaged for a total of 30.6 billion hours on the Roblox platform last year, 124% higher than 13.7 billion hours in 2019. The number of daily paying users also touched 490,000 in 2020, up from 184,000 in 2019 and 125,000 in 2018.
Click here to check out our Video Game Industry Report for 2021
Unity Software
Unity operates a 3D real-time gaming development platform. Its platform provides software solutions to create and monetize interactive 2D and 3D content on mobile phones, tablets, consoles, PCs as well as AR-VR devices.
Shares of Unity Software (U) are trading at $106.50 at the time of writing this report, which means the stock is down 40% from its record high. Despite this significant dip, Unity has returned over 50% since it went public last September.
Unity Software shares fell after the company reported its Q4 results last month. The sell-off in the tech sector soon after exacerbated this decline.
In the December quarter, Unity reported sales of $220 million, an increase of 39% year-over-year. Unity’s adjusted loss per share stood at $0.10 much narrower than the loss of $0.79 per share in Q4 of 2019.Comparatively, Wall Street forecast sales of $204 million and loss of $0.14 per share for Unity in Q4.
Investors were perhaps worried about the company’s decelerating top-line growth as sales were up 53.3% in Q3. Further, Unity forecast sales between $210 million and $220 million, translating to a 29% revenue growth at the midpoint.
During the earnings call, Unity claimed mobile games created with its software tools allowed it to capture a 71% market share among the top 1,000 titles. The company also ended 2020 with a high net retention rate of 138%, up from 133% in 2019. The net retention rate is basically the percentage of recurring revenue derived from existing customers in a particular time period.
The verdict
Unity Software is valued at a market cap of $30.26 billion, which means its trading at a forward price to sales multiple of 29x. Analysts covering the stock have a 12-month average price target of $139.20 which is 29% above its current trading price.
Roblox on the other hand has a market cap of $42.39 billion and is trading at a price to sales multiple of 22.8x. While Unity is still unprofitable, Roblox is forecast to post an adjusted profit of $0.31 per share in 2021.
Therefore, I believe Roblox’s lower valuation and rising profit margins make it a better buy for value-oriented growth investors at this time.
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RBLX shares were trading at $77.32 per share on Wednesday afternoon, up $0.32 (+0.42%). Year-to-date, RBLX has gained 11.25%, versus a 5.43% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.
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