Roblox Hopes Targeted Advertising Hits the Mark With Investors

Key Points

• Roblox stock spiked higher after the company announced it partnered with Alphabet to launch programmatic advertising for its Rewarded Videos.
• The new revenue stream comes when the company reports solid growth across many industry metrics.
• However, investors must weigh recession concerns and the company’s lack of profitability when making an investment decision.

Roblox Corp. NYSE: RBLX announced a partnership with Alphabet Inc. NASDAQ: GOOGL that will allow brands and agencies tied to its Rewarded Video ads to buy advertising from Alphabet via Google Ad Manager’s programmatic advertising solutions.

The move is being made to launch additional revenue streams and comes at a time when Roblox is showing solid year-over-year (YOY) gains.

For the full year 2024, the company reported revenue of $3.77 billion, a 7% increase from the $3.5 billion it logged in 2023. And it’s forecasting revenue between $4.25 billion and $4.34 billion in 2025, a 12% YOY increase at the low end.

Some key metrics supporting that revenue growth include an increase in average daily active users (DAUs), net bookings that increased 24% YOY (and are forecast to increase by another 19% in 2025), and an increase in daily unique paying users.

However, after moving higher due to the Alphabet announcement, RBLX stock, along with other consumer discretionary stocks, was swept lower after the Trump administration announced a sweeping tariff program.

But a company like Roblox shouldn't be directly affected by trade policy, so it’s important to pay attention to why the stock was rising before the tariff announcement and what obstacles could prevent it from moving higher.

What’s Old Continues to Be New Again

Roblox is the latest company to attempt to capitalize on the benefits of advertising revenue. Selling advertising on a platform is one of the most cost-effective ways for companies to generate high-margin revenue.

Specific to Roblox, the company’s Rewarded Video ads let users opt-in and watch 30-second full-screen video ads within the company’s immersive games. In return, users get in-game benefits courtesy of the creators of the games and experiences who also publish the ads. A key metric for measuring success is in ad completion. And in early testing, Roblox was seeing an average completion rate of over 80%.

Since before the internet, advertisers have debated the difference between taking a shotgun or rifle approach to advertising. Programmatic advertising is firmly in the latter camp. It uses automated technology and algorithmic tools to identify user (customer) signals to closely target ads to the right person, at the right time in the right place.

Remove Ads

By automating ad placement decisions, companies don’t have to negotiate prices or placements.

Programmatic advertising is not a new idea, but it’s an area that continues to evolve. And companies like Google Ad Manager on the supply side and The Trade Desk Inc. NASDAQ: TTD on the demand side are on the leading edge of programmatic advertising.

RBLX Stock: What Could Go Wrong?

The short-term threat for Roblox is if the U.S. economy dips into recession. Historically, recessions mean that advertising budgets are the first target for companies looking for areas to cut. That’s a concern that’s been holding back GOOGL stock.

However, companies tend to make those cuts before the recession is official. If the economy has already been in a rolling recession, has the threat already passed? That's something that investors will want to watch closely. The impact likely won’t be noticeable when Roblox reports earnings on May 1, but investors will want to closely watch second-half earnings results.

A secondary concern is that Roblox isn’t profitable. If the tariff-induced sell-off reminded investors of anything, it’s that profits matter. Roblox is growing its topline impressively, but now they have to show investors that ad revenue can make the stock profitable.

Adding to the fundamental concerns, RBLX stock is trading at a premium with a price-to-sales of around 5.9x, which is higher than the industry average of 2.3x.

Prior to the April 2 tariff announcement, analysts were increasing their price targets on RBLX stock. That could mean a much higher share price for RBLX stock, but it may come with some short-term headwinds.

The Charts Suggest Volatility Ahead

RBLX stock has taken a round trip in the last 30 days and not in the way shareholders would like to see. As of midday trading on April 8, the stock is trading above its 200-day simple moving average but below its 50-day SMA.

This is a mixed trading signal.

On the one hand, trading above the 200-day SMA suggests the stock may have long-term momentum. However, being below the 50-day means there will likely be some volatility in the coming months.