On October 8, noted activist short-selling group Hindenburg Research released a report alleging that Roblox (NYSE: RBLX) has been reporting inflated metrics.
Hindenburg Research is notorious and feared on Wall Street for its takedown reports — in the case of The Nikola Corporation (NASDAQ: NKLA), the report eventually led to the ousting, arrest, and conviction of former CEO Trevor Milton for fraud.
At press time, the stock is trading at $40.11 — down 7.30% over the past five days.
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Hindenburg Research accuses Roblox of inflating metrics
Hindenburg’s latest report on Roblox centers on accusations that the company has inflated its user metrics by as much as 25% to 42% to attract and retain advertisers.
While Roblox claims to have over 65 million daily active users (DAUs), Hindenburg suggests that these figures may be overstated. Per the report, user growth appears to be stalling, and the use of bots and other automated systems allowing a single person to run more than 20 accounts simultaneously in the game appears to be a widespread issue.
This is supported by Roblox’s own disclosures, which state that DAUs ‘are not a measure of unique individuals accessing Roblox’. While the company has told the SEC that it is unable to verify whether or not a single user has multiple accounts, per Hindenburg, former employees have revealed that this is in fact something that is tracked by the company.
Furthermore, insiders have alleged that while this ‘de-alted’ list, a more accurate representation of daily active users, is used internally, the other, inflated list, is used in the company’s official dealings with regulators, shareholders, and advertisers.
This is not the only metric that appears to be inflated — Roblox claims that the average engagement hours per user are 2.4 hours per day — a figure 58% higher than what the target demographic in the United States (8 to 12-year-olds) spends playing games. If this were a legitimate metric, it would surpass popular social media platforms by 26% to 166% in terms of engagement.
Roblox — a risk for advertisers and brand image?
The firm argues that this poses a risk for advertisers who rely on Roblox’s metrics to gauge audience reach and engagement. Any misrepresentation of user activity could shake advertiser confidence in the platform, ultimately threatening a significant revenue stream.
Apart from getting a significantly smaller return on ad spend than expected, companies also expose themselves to reputational risk by advertising agreements with RBLX. Although some moderation issues were known to the public, Hindenburg’s report reveals in grueling detail the extent of illegal, NSFW, illicit, or extremist content widely available to the target audience of children.
In addition to these factors, the research company noted a stark uptick in insider selling over the last 12 months, as well as the resignation of the company’s chief financial officer (CFO) Michael Guthrie, chief technology officer (CTO) Daniel Sturman, and chief marketing and communications officer (CMCO) Barbara Messing from October 5, 2023, to August 1, 2024.
The future indeed looks dire for Roblox, amidst a string of disappointing quarters and diminishing profitability — and this report is undoubtedly going to attract regulatory scrutiny and investor mistrust. Punitive measures from regulatory bodies, class action lawsuits, or widespread public backlash are also by no means unlikely.
