Roblox faces Hindenburg short attack: why this could be a buying opportunity

Roblox shares are under pressure during trading today as Hindenburg Research has made public its short position in the company’s stock.

Hindenburg Research, a firm known for crashing stock prices after taking short positions in stocks, has raised questions about the company’s recent insider selling record as well as its potential for profitability.

What is Hindenburg’s bear thesis for Roblox?

Roblox is valued at $27 billion but has not made a profit since going public in 2021.

Instead of showing its profitability, or lack thereof, the company focuses on reporting user metrics.

Hindenburg claims that the company’s extraordinary focus on these metrics rather than profitability is intentional, helping insiders sell stock with promises of profitability that never seem to materialize.

The current Daily Active Users (DAU) numbers are overstated by 25-42% according to the research house.

As a result of these metrics, there is an expectation that Roblox is poised for future growth, which helps the stock trade at a premium to its peers.

The stock is currently trading at a price-to-sales ratio of 8.6, 57% higher than what its peers trade at.

This high valuation, coupled with Hindenburg’s belief that the user metrics are grossly overstated, makes it an ideal stock for a shot trade, which is what the research firm is doing.

However, there is reason to believe that this short attack won’t damage the company as it is poised for future growth with healthy cashflows.

Why is Roblox a buy?

There isn’t a way to confirm if Hindenburg’s claim of overstated user metrics is true.

But going by the company’s performance, one is inclined to believe that the potential for future growth is there.

Roblox has recently partnered with Shopify. Shopify will help the company integrate e-commerce into its platform, expected to be launched in 2025.

This opens up Roblox for not only advertising revenue but also potential commissions on sales that take place on its platform.

If Shopify has partnered with the company, in a way it confirms that a healthy userbase is there, or Shopify wouldn’t have considered it worth their time.

Investors looking for some proof of the growth potential may not have to wait long.

Roblox’s developer exchange fees and infrastructure costs are both stabilizing.

These costs have declined as a percentage of its bookings quarter over quarter.

This means that going forward, an increase in bookings could directly add to its bottom line.

This could become a possibility as soon as early next year when the company announces the numbers for the second half of 2024.

If bookings increase by the same amount as last year compared to the first half of the year, the bookings revenue could overshoot guidance by about 21%.

The above could result in a free cash flow for the year of over half a billion dollars.

This is consistent with the management’s promise of seeing incremental operating margin and free cash flow.

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