Gaming the rules to teach kids about stock market
To research the hottest new tech stock,
Roblox, I went straight to my highly pluggedin, in-house analyst — my 11-year-old daughter.
She patiently explained the user-generated games, the in-app purchases and the revenues available to both gamers and creators on this gaming platform.
After that, we arranged for a $50 investment of her money in shares on the first day they became available, March 10. (If you’re wondering how to invest $50 in shares that cost $65 each on the first day of trading, the technical answer is the investing app known as M1 Finance, which allows for fractional ownership of shares. I wrote a thing about it in December 2018.)
Roblox listed 199 million shares on the New York Stock Exchange last week but did it in an unusual way: a direct listing instead of an initial public offering.
Most companies that list shares on stock exchanges first do an initial public offering, or IPO. An IPO involves investment bankers preparing a “roadshow” and negotiating the issu
ance price that all new investors will pay. A company doing an IPO typically seeks to both raise new money for the business and allow previous investors to sell some of their shares in the business.
A direct listing raises no new money for the company. It merely allows privately held stakes to be floated on an exchange — to allow insiders a chance to cash out and outsiders a chance to buy in.
Roblox didn’t need new money, in part because it secured $850 million in private financing in January, solving the fundraising part of an IPO ahead of time. Roblox ended 2020 with close to $1 billion on hand, further explaining why it skipped the fundraising part of an IPO. It also saw fourth-quarter revenue jump 111 percent from the same period in 2019. That’s the kind of growth tech investors crave.
Roblox had cash, name recognition and buzzy growth, so the road show and fundraising parts of going public were unnecessary.
Until now, direct listings have been extremely rare. Spotify, the audio-streaming company founded in Sweden, is the highestprofile direct listing ever. It listed its shares on the stock market in 2018.
By direct listing rather than hiring a Wall Street underwriter, a company in theory can save huge bucks, typically 3 to 7 percent of the money raised. A direct listing not only forgos the support of a new issuance, it skips the marketing hype that accompanies a traditional roadshow. In the case of Spotify and Roblox, they didn’t need the marketing hype. Among their customers and within their own industry, they are dominant providers.
And by all appearances, the shares didn’t do worse as a result of a direct listing instead of an IPO. Roblox soared 54 percent from its initial listing price on the first day.
This direct listing method is pretty new stuff.
The New York Stock Exchange moved in the direction of allowing more direct listings through a request to the Securities and Exchange Commission in 2019. In December, the SEC approved direct listings under certain conditions. The Roblox listing last week is the first highprofile test of this way companies can reduce their Wall Street fees. And given its success, we should expect more companies going public to choose this route in the future.
Meanwhile, Roblox is innovating in other ways. For better and worse, it has mastered the art of capturing kids’ attention with its immersive-world game platform.
For the past year as my daughter has schooled from home and lacked ordinary interactions because of COVID-19, Roblox has occupied more of her time than any activity.
What does she do on Roblox? It’s virtual-reality games. Her favorite game, “Adopt Me,” involves adopting a pet and then upgrading that pet into the most stylish and unique pet possible. Her latest acquisition, a golden unicorn via a hard-earned golden egg, was incredibly exciting apparently. (You had to be there.) Other games within the virtual reality involve heists, escaping burning buildings and avoiding a killer. Normal stuff kids are into, I guess.
Roblox, as a games platform, facilitates user-generated content, meaning gamers can invent their own games. For that, designers receive either virtual dollars or real dollars. In real dollar terms, more than 1,000 game designers have earned more than $10,000 in the past year on the Roblox platform.
Through the course of this column, I have described breaking at least three of Mike’s Cardinal Rules of Investing, so I briefly want to acknowledge these and then explain my transgressions.
First, I don’t recommend you buy individual stocks. For kids, however, I do think purchasing individual stocks is useful for teaching and learning purposes.
Buying individual stocks for companies they know can get them excited about the magic of investing, capitalism, markets and compound interest.
Second, I never write about individual stocks I own (or my family owns) because I don’t generally own any and also I don’t want even the appearance of a conflict of interest. To which I can only plead with you to believe that I have not sold my journalistic soul to shill and pump up my 11-year-old’s $50 stock investment.
To be clear, in no way do I recommend Roblox shares for any of you. This thing is probably going to zero. Which would be a great educational outcome for her!
Finally, I always recommend against buying new listings — traditionally, IPOs — for a variety of prudent reasons having to do with information disadvantages, media hype and the greedy exuberance of insiders selling to a credulous group of outsiders.
Please excuse my rule transgressions today. They were each done with an educational purpose.