Short seller Hindenburg alleges Roblox inflated key metrics, and gaming company hits back

By James Rogers

Roblox 'totally' rejects Hindenburg Research's claims

Roblox Corp. shares are down 3.3% Tuesday after short seller Hindenburg Research alleged that the online gaming company has inflated key metrics.

Roblox (RBLX) said that it totally rejects Hindenburg's claims.

In the report, which was released Tuesday morning, Hindenburg alleged that Roblox "could be massively overstating" the true level of user engagement across its platform. The company, Hindenburg claims, is inflating the number of people on the platform by 25% to more than 42%. Hindenburg also alleges that engagement hours, a key metric for Roblox, is inflated by more than 100%.

"The company has reported net losses every quarter since becoming a public company, with last twelve months (LTM) losses totaling $1.07 billion," Hindenburg said in the report. "Its stock trades at 8.6x sales, a 57% premium to gaming peers, pricing in expectations of rapid future growth and profitability."

Related: Why Roblox's stock is dropping in the face of upbeat results

Hindenburg added: "Since Roblox isn't profitable, its stock price (and, in turn, insiders' ability to dump hundreds of millions of dollars of stock) is reliant on the growth metrics it presents to Wall Street."

Citing interviews with former Roblox employees, Hindenburg alleges that the company "effectively has two sets of books for counting users: one for internal business decisions, in which multiple accounts are 'de-alted,' and one used by the finance team that reports higher metrics to investors."

"De-alting" refers to the process of internally tracking users who have multiple accounts, according to Hindenburg. "In 2023, Roblox told the [Securities and Exchange Commission] it is 'unable to identify if a user has multiple accounts,'" Hindenburg alleges.

Citing an interview with a former senior product designer, Hindenburg also claims that Roblox is compromising child safety in order to report growth to investors.

Related: Roblox's stock tumbles after a big revenue miss, and worries about 'engagement'

Roblox hit back at Hindenburg in a statement provided to MarketWatch. "We totally reject the claims made in the report," the company said, describing the financial claims made by Hindenburg as "simply misleading."

"The authors are, admittedly short sellers and have an agenda irrespective of the substance of Roblox' business model and results," Roblox said in the statement.

Over the past four quarters, Roblox's bookings, or cash receipts, have grown over 22%, from $780.7 million in the second quarter of 2023 to $955.2 million in the second quarter of 2024, the company said.

"Over the same time, cash provided by operating activities has totaled $646.3 million, free cash flow was $440.3 million, and we have guided to even higher numbers for fiscal 2024," Roblox said. "An examination of our GAAP balance sheet and our GAAP cash flow statement makes that clear. The focus on cash bookings and cash flow are themes that we have focused on consistently with investors dating back to our days as a private company."

Related: Roblox earnings bring a big bookings milestone, sending the stock rocketing

Hindenburg "made no attempt to highlight any of that because the positive facts simply don't support their agenda," the company added. "We firmly believe that Roblox is a safe and secure platform and in the financial metrics we report."

Roblox shares are down 12.5% in 2024, compared with the S&P 500 index's SPX gain of 20.3%.

The company's bookings numbers are closely watched. Almost all of Roblox's bookings are generated from sales of virtual currency, which can be converted to virtual items on the platform.

Related: Roblox, Genius Sports and Imax named 2024 top EDM ideas at Benchmark

When Roblox reported second-quarter results in August, it beat the consensus view on bookings and gave third-quarter bookings guidance of between $1 billion and $1.025 billion.

-James Rogers

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10-08-24 1238ET

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