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Following Hindenburg’s scathing report on Super Micro Computer (Nasdaq: SMCI) in early September, the SMCI stock barely budged after a month. After the 10-for-1 stock split, SMCI is now priced at $45.46 vs. $45.1.

The investment research firm has now set its shorting sight on a gaming company, Roblox (Nasdaq: RBLX). Will the effect on RBLX stock be equally muted, or is there more meat to the allegations this time? 

Year-to-date, RBLX stock is down 7.42%, currently priced at $40.07 against the 52-week average of $39.03 per share.

Why Did Hindenburg Investigate Roblox?

In May, we reported that RBLX stock took a dip after downgrading Q2 2024 guidance. Although Roblox has shown a steady rise in gross profit since 2020, Hindenburg Research posits that its valuation is not fair based on two main factors:

• Roblox accrued $1.07 billion losses in the last 12 months, while RBLX shares trade at 57% premium compared to its gaming competitors.
• Roblox experienced heightened insider activities, with them cashing out $1.7 billion since the company went public in 2021. For the last 12 months, insiders erected a ~$150 million selling pressure, most of which ($115M) coming from Roblox CEO David Baszucki.

Having not achieved net profitability, these factors drove Hindenburg to investigate Roblox claims further. In particular, that the gaming platform doesn’t accurately portray Daily Active Users (DAUs) activity, citing one quarter in 2022 that “there are over 54.1 million people coming to Roblox every day.”

According to Roblox’s own disclosure, this metric could include bots or users with multiple accounts. Purportedly, Roblox cannot discern the latter. However, after interviewing former Roblox employees, Hindenburg posits that the company holds dual DAU bookkeeping, one for the SEC filings and one for internal business decisions, in which it is indeed possible to track single users with multiple accounts.

One such employee called this practice “de-alting.” By that internal metric, Roblox’s DAU activity would be lower by 20 – 30% from the officially stated one. In addition to this misrepresentation, Hindenburg argues that the platform is plagued with bots, citing Blox Fruits and Adopt Me! games as examples.

Overall, Hindenburg posits that Roblox would have a significantly lower valuation if de-alted and de-botted metrics were to be accounted for. Lastly, the research group purportedly found gaming content and user activity not suitable for children, although this issue is widespread across all social media platforms, including YouTube.

Does Roblox Obfuscate Real Metrics?

Going by the X (Twitter) experience alone, it is not far-fetched to conclude that Roblox would have the same botting problem. After all, such tutorials are readily available for better or worse. The problem is when these bots are then used to manipulate front pages to artificially inflate player count for particular games. 

Likewise, bots are often deployed to spam messages and promote scams. On the largest PC gaming platform Steam, this is still an ongoing issue. 

With that said, while looking at Roblox games like Blox Fruits in the context of YouTube viewership, they regularly have exceedingly high view count in hundreds of thousands. This is comparable to the viewership of biggest multi-platform hits like Baldur’s Gate 3.

More importantly, in August’s shareholder letter for Q2 2024, Roblox reported an all-time high of 16.5 million Monthly Unique Payers, representing a 22% increase from the year-ago quarter. Differing from players, Hindenburg didn’t address this metric, which should be counted in a straightforward manner.

In other words, even if de-alted and de-botted figures are taken into account, Roblox still has solid growth prospect.

What Did Roblox Report in Q2 2024 Earnings?

In Q2 2024, Roblox reported 31% year-over-year growth to $894 million. The company cited a much greater DAU number than the one Hindenburg cited, at 79.5 million, making a 21% year-ago increase. 

Yet, with these record highs, the company still generated a net loss of $207.2 million, although significantly improved from the net loss of $284.8 million in the year-ago quarter. But is this sustainable?

Purportedly, Roblox holds $3.6 billion in cash, cash equivalents, short-term and long-term investments. Against the debt of $2.6 billion, which increased by $575.2 million from year-ago, this makes for a debt-to-equity ratio of 8.27. 

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