Roblox (NYSE:RBLX) preps for video advertising in move that could supercharge platform

Roblox (NYSE:RBLX), a popular immersive platform where users can create and share games and virtual worlds, tells investors it wants to reimagine how people come together by giving them new ways to “enhance and deepen positive human connection.” The company is also about to change the way advertising is delivered to the next generation of consumers. 

PubMatic (NASDAQ:PUBM), a digital advertising company, is partnering with Roblox to enable media buying of video ads on the platform later this year. The move will allow brands to reach a community of 71 million daily active users without having to create custom-built content, while Roblox gets an advertising solution that PubMatic says “marries monetization with user experience.” The development is notable as it places Roblox on the path first perfected by tech industry behemoths like Google (NASDAQ:GOOGL) and Meta (NASDAQ:META), which generate most of their revenue by serving ads to the people who use their products.  

Roblox has yet to tap that kind of scalable profit potential despite reporting double-digit growth last year in daily active users and engagement hours. Nearly all of the company’s current revenue comes from sales of its virtual currency that can be used to purchase virtual items on the platform, with existing advertising and licensing arrangements accounting for an “insignificant amount.” This suggests a lot of room for growth, and it could help support shares that have declined 8.4% over the past year. Video game advertising in the US alone this year is expected to exceed $8.5 billion, which far surpasses the $2.8 billion of revenue Roblox reported last year. 

“We had the most brand engagements ever in Q4, 69 great brands working with the platform, and we’re scaling up over 2024,” co-founder and CEO Dave Baszucki said in a recent earnings call, adding that the company was also experimenting with physical shopping.

It’s clear why advertisers would want to get in on the action. The company says its user base is “diversified across multiple dimensions” and comes from over 190 countries. Only 18% of users are over the age of 25, which shows exactly why brands like Adidas (CBOE:ADS) and the NBA have already rushed to create experiences on the platform and reach Gen Z consumers. While ads won’t be shown to users under 13, who make up 42% of the user base, they’ll eventually age into the more monetized environment. Last year, Roblox reported over 60 billion hours of engagement, with the average user spending 2.4 hours each day on the platform. That’s a lot of time for ads to be served. 

The advertising program, meanwhile, has the potential to invigorate the ecosystem by providing new incentives for creators who can participate in revenue sharing. There are currently 4.4 million active, user-created “experiences” on the platform, with 3,000 generating at least one million hours of engagement last year.

“The potential for advertising, due to our large and growing Gen Z audience, and eventually, real-world commerce, highlights new opportunities for creators, including brands, to expand the ways they can earn,” the company said in a 2023 year-in-review letter. Roblox will need to be careful to ensure the coming ads don’t overwhelm its virtual worlds and turn off users, and it’s implemented a strict set of rules to help orient new brands on the platform. 

Perhaps the most important aspect of Roblox’s advertising program is how it could transform the way investors think about the company, which only began providing forward guidance last quarter. While the company reports actual revenue, it currently prefers a metric it calls bookings to better account for certain non-cash adjustments connected to virtual currency purchases. That can make it hard for analysts to compare the company with peers and formulate proper valuations. Those analysts, however, understand advertising revenue, and they understand Facebook and Google. Indeed, analysts jumped at the chance to ask about advertising metrics in the latest earnings call and were told more information would come as the program gets underway. Advertising numbers are well-known and comparable, giving analysts a familiar metric they can readily utilize. That could open up the company to a new class of investors who may have been waiting for more sophisticated information and predictable revenue streams. 

As for that guidance, Roblox, which has yet to report an actual profit, told investors it expects to “compound its top line” by 20% a year through “at least” 2027. That’s a prospect for exponential growth that should be more than enough to pique interest from investors on the hunt for the next company attempting to transition from a niche player to a platform capable of reaching billions.