CARU, or the Children’s Advertising Review Unit of BBB National Programs, an independent children’s advertising watchdog, has found Roblox (NYSE:RBLX) in violation of its ad guidelines. The gaming platform’s business depends on its reputation as a safe and civil environment for children. Thus, any unfavorable publicity could harm its business and stock price.
The RBLX had not appropriately informed its young users that the content featured in the video was advertising, according to CARU. Additionally, RBLX’s social media influencers didn’t correctly label their content.
RBLX generates roughly all of its revenue from the sale of virtual items to enhance the social experience. While the company makes a small amount of money through advertising, it is still insignificant. Thus, developing a new revenue stream like advertising could diversify its income sources and support overall growth.
Roblox has implemented robust policies to create a safe environment for users. Earlier, it announced a ban on all advertising targeted at children under 13 years of age. The new policy changes will go into effect on June 15 and will likely remove CARU’s concerns.
Roblox announced its Q1 financials on May 11, wherein its bookings, average daily active users, and user engagement improved. Coming out of the Q1 conference call, Goldman Sachs analyst Eric Sheridan highlighted the “rising narrative around advertising” on RBLX’s platform. However, the analyst maintained a Sell rating on the stock, citing unfavorable risk-reward.
Is Roblox a Buy or Hold?
RBLX stock has gained over 38% year-to-date. Meanwhile, analysts maintain a cautiously optimistic outlook on the stock.
It has received 11 Buy, three Hold, and three Sell recommendations for a Moderate Buy consensus rating. Analysts’ average price target of $44.36 implies 12.7% upside potential from current levels.
