With a user base of more than 52 million, Roblox (RBLX) is among the top entertainment and gaming platforms out there. Anyone with kids and an internet connection knows the power of ‘Robux’ in getting their tweens and teens to clean up their room or do their homework.
Yet like many other online platforms, the struggle to continue making money is real. Which is why Roblox is planning on allowing advertisers to pay for the privilege of showcasing their brands in the virtual-reality worlds Roblox has become known for.
As part of its annual developer conference last Friday, Roblox said it plans to debut ads next year. Prior to the rollout, Roblox said it will be testing ads with unspecified developers and brands by the end of this year.
It is a move that other online platforms and services including the likes of Twitter (TWTR), Snap (SNAP), which owns Snapchat, ByteDance-owned TikTok and others have been increasingly engaging with amid post-pandemic plateaus in user growth and increasing expectations to make more money.
Roblox Revenue Growth Has Slowed
Robox essentially works like a virtual Lego world, where users can build virtual worlds, either on their own or with others, in pretty much any creative way they can imagine. Roblox makes money by selling Robux, which allows users to buy virtual building tools with real cash.
What has been absent in Roblox’s user-created worlds has been brands paying to build their own virtual worlds that entice other users to hop in. Imagine Starbucks (SBUX), for example, having a virtual world of coffee shops and coffees, or American Eagle having virtual clothing stores.
Roblox describes its upcoming ad offering as immersive ads, though there’s not yet a standard format for how they will appear, though Roblox and others have speculated that ads in the metaverse could resemble digital goods like shoes and clothing that people could buy and wear – virtually of course.
Roblox has tried out some online ads with brands like Warner Bros. and shoe and clothing maker Vans. The ads were displayed in an experimental ad format that Roblox referred to as “portals.”
In the portal ad tests, when users interact with the brand, they can be automatically transported to the company’s virtual Roblox community, according to Roblox. At this stage, companies are just trying to understand how ads can function in Roblox and other metaverses.
Virtual Fight for Market Share -- and Survival
Roblox is jumping into online ads during a period of turbulence in the market. Meta’s (META) Facebook business and Snap have been particularly hurt by Apple’s privacy changes in iOS, which make targeting more difficult.
Meanwhile, Amazon (AMZN) and Apple (AAPL) are bolstering their ad businesses, as companies that rely on those platforms are spending more money to get in front of consumers.
All of that has impacted Roblox's bottom line -- and in turn its stock price.
Roblox debuted on the New York Stock Exchange in March 2021 and saw its market cap surge past $80 billion in November as investors poured into high-growth tech stocks. But this year’s economic slowdown has punished those businesses, including Roblox, which has shed 60% of its value this year.
In August, Roblox reported second-quarter financials that missed on both the top and bottom lines, and revenue growth slowed to 30% from more than 100% a year earlier. The company said in its quarterly filing that it generates “substantially all” of its revenue from the sale of Robux.
To be sure, analysts remain skeptical of Roblox’s prospects. Cowen analyst Doug Creutz on Monday initiated coverage on Roblox with an underperform rating and a one-year price target of $31. In premarket trading on Monday, shares of Roblox were down 1.6% at $44.80.
