By skyforbes On the 8th of October 2024, Hindenburg Research released its damning report on RBLX: Roblox: Inflated Key Metrics For Wall Street And A Pedophile Hellscape For Kids. Hindenburg detailed several inflated key metrics, unconfident management, and many instances of sexual abuse, grooming, and a lack of safety measures. If you don't know, Hindenburg is famous for their excellent and detailed short theses; they are known for for exposing companies such as Carvana, Nikola, Icahn Enterprises, Singularity Future Technology, and many more. They take on short positions in the companies before posting their reports, which often crash massively following the publication. The reports feature high-quality investigative journalism, talks with insiders, and investigations from third-party consultants. Unfortunately, Hindenberg Research shut down in January 2025, with their last report being on Carvana. This post will be built upon the original report, with new information since the publication, and my own perspectives and conclusions. I really recommend reading the original article, as it goes into much more detail than I will.
Surprisingly, unlike most of their reports, it had little effect on the stock price. When the article was released, the stock was trading at $40; now it's trading at $132 – a 230% gain. This rally has been fueled by Roblox reporting tremendous growth. In Q2, they reported a 51% increase YoY in Robux spend, a 41% increase YoY in active users, and a 21% increase YoY in revenue. It is a seemingly amazing growth story, with Cathie Wood on board, holding about 1.4% of outstanding stock. They currently have 110M Daily Active Users (DAU) and have a long-term vision of 1B people playing Roblox.
Despite the surge in stock price, the flaws that Hindenburg pointed out are still in place, future growth is uncertain, and the path to profitability seems very unlikely.
The Financials
(One of the most important financial measures that Roblox releases in their reports is bookings*. This is the amount of money spent on Robux, a virtual currency used for in-game transactions, and it represents almost the entire income of Roblox Corporation. The bookings number is then deferred into revenue over as many as 27 months, which means that revenue is lagging behind the bookings number.*)
Since its IPO in 2021, Roblox's cumulative net losses amount to almost $4B, and it has never earned a profit in a single quarter. Just in the last twelve months, they lost $952M. These losses have also partially been funded with Roblox issuing new shares. Since the IPO, they have issued more than 100M shares, increasing the amount of shares outstanding by 20% and diluting shareholders. But maybe at least management believes in this growth story they built? Unlikely. Since IPO, insiders have cashed out $1.7B, with the CEO personally cashing out $526M. Also, several key C-suites have recently left; the former CFO, Michael Guthrie, who joined in 2018, left in June this year, and the CMO and CTO, who joined in 2020, both left in 2024. This signals low trust in the long-term prospects of Roblox.
Right now, Roblox is sitting at a market cap of 91B, which makes it one of the largest gaming companies, although it trails behind some giants like Nintendo, Tencent, Sony, and Microsoft. It is trading at a very high price to sales ratio of 22, which can be compared with Nintendo at 10, Take-Two at 8, and EA is being bought out by the Saudis at a price to sales of 'only' 7. Over the last twelve months, RBLX managed to make almost $1B in free cash flow, but that still places them at a price to free cash flow of nearly 90.
As Hindenburg reported, the amount of Daily Active Users is likely overstated by 25-42%, due to them counting at least some alt and bot accounts. They have internal metrics that correct or 'de-alt' these numbers, but management chooses to still report these higher figures, as retroactively changing the numbers would look troubling for potential investors. There are currently 9.82B registered Roblox accounts. Yes, there are more Roblox accounts than people on this earth. What a time to be alive! Most of these accounts are likely alt accounts or bot accounts and do not represent real people.
They also report that DAUs are spending an average of 2.4 hours per day on the platform. According to Hindenburg's own investigation, the real figure could be as low as 22 minutes. This is a key metric that is important to advertisers who want to buy in-game advertisements, which is a source of income that management is really pushing. In 2024, they claimed that only 20% of hours engaged are effectively commercialized; management wants to push this number to 100%. They want to make sure that these poor kids never experience a moment of peace without being bombarded with ads or being pushed to purchase useless cosmetic items. There are also doubts as to whether companies will want to advertise on a platform infamous for child groomers and games such as 'Escape from Epstein Island'. Furthermore, there is a limited amount of money to be made in advertising to people without any income.
Roblox is already saturating its most profitable markets
The by far most lucrative market for Roblox is the US & Canada. In Q2, they earned an average of $40.69 in bookings per daily active user (ABPDAU) in the US & Canada region. This means that American and Canadian daily active users are spending on AVERAGE $163 per year on Robux! (Note: this does not mean that the average Roblox player is spending $163, as the total amount of paying users may be higher than the daily active user count, but it is nonetheless really high.)
The next most profitable market in Q2 was Europe, where DAUs were spending on average $11.49 on bookings. Whereas for Asia that figure was around $4.95, and for the rest of the world it was only $4.29.
Let's determine just how saturated the US, Canada, and Europe markets really are. 81% of DAUs are in the age range of 5-24 years old. I will assume that they also make up about 80% of the bookings. There are about 95 million 5-24-year-olds in the US & Canada, while in Q2, Roblox reported 20.6 million daily active users in the region. This means that about 17% of the 5-24 year old population are DAUs, which means that on any given day, 17% of 5-24 year olds are going to play Roblox. In reality, with the overreporting of users, that percentage is maybe closer to half, but it really seems like the market is starting to saturate.
Europe has a 5-24 year old population of about 160M and 25.6M DAUs, leading to a saturation percentage of about 13%, which I believe to also be close to saturation. Also, the number of newborns in Europe is declining rapidly, leading to a smaller potential future player base.
They are pushing for growth in Asia, especially, but the profitability there is much lower, and parents are stricter with how their kids spend their time, and especially money. For the sake of argument, let's say that Roblox manages 15% saturation in the 5-24-year population in Asia and the rest of the world. With the current average bookings per DAU in these markets, I have calculated that Roblox would then make 12.86B in total bookings per year, compared with the current number at 5.75B per year. So, with 15% of all kids in the ENTIRE world playing Roblox, they would only increase their revenue by 120%. Let's say that they somehow managed to make a 20% net profit margin on these hypothetical bookings (current gross profit margin is about 25% and net profit margin is NEGATIVE 25%), then they would still only make 2.57B in net profit. That would correspond to a PE ratio of 35!
However many billions of dollars spent on Robux, it is still hard for Roblox to actually make a profit. They spend a lot of money compensating user developers for their games, they spend a lot on salaries for software engineers in San Mateo, California, and they spend a lot on infrastructure and safety. To be clear, without this spending, there would be no growth. I believe they can turn a profit eventually, but I think it will be less than most analysts have baked into their spreadsheets.
The Pedo Problem
The Hindenburg report revealed an "X-rated pedophile hellscape, exposing children to grooming, pornography, violent content, and extremely abusive speech". They reported how the company prioritized growth over safety, and how, despite a massive increase in users, their spending on trust and safety expenses has actually declined.
There have been many instances of child groomers using Roblox to find vulnerable victims on the platform. The National Center on Sexual Exploitation in 2024 labeled Roblox “a tool for sexual predators, a threat for childrens’ safety”. There have even been criminal indictments for kidnapping and rape related to the platform. Still, there continue to be new criminal cases brought against Roblox for the lack of safety for minors on the platform. The Hindenburg reported how there were open pedophile rings on Roblox where users were trading child pornography, grooming children, and discussing pedophilia.
There has been some improvement in safety since the Hindenburg report. But it is still not enough, and there has been permanent damage to the reputation of Roblox and parents' trust in the game. Since the Hindenburg report, they have rolled out age estimation technology using AI facial scans (don't think about the privacy concerns of scanning millions of minors' faces pls). They have also apparently improved chat and voice filters and added more parental controls.
However, there are still issues. For instance, take the National Center on Sexual Exploitation article that was released in August: Roblox’s Predator Problem and Why Federal Inaction Lets Them Get Away With It
They recently banned the YouTuber Michael Schlep, who is known for exposing sexual content and child predators on the platform after he himself was groomed by a Roblox developer as a teen. Roblox banned him on the basis that they do not permit 'vigilante' activity. Rather than focusing on banning child predators, they are banning users who expose them.
Roblox has also lobbied and continues to lobby against new online child protection laws. Republican representative Laurie Schlegel tweeted in August:
Several high-profile cases have been brought against Roblox, and new ones are being started all the time. Here are a few noteworthy recent examples:
- A 15-year-old Californian boy was groomed via Roblox and Discord, and eventually took his own life in April 2024. His mother is now suing both companies. link
- A Wisconsin 5-year-old was sexually exploited on Roblox. They filed a civil lawsuit against Roblox on October 7th. link
- Michigan lawsuit claims 10-year-old was sexually exploited on Roblox link
- State Attorney Generals from Florida, Louisiana, and Kentucky have all announced legal action against Roblox. link, link, link
- California opened a class action lawsuit against the company in May, link
In August, WIRED also wrote an article called: Is Roblox Getting Worse?. Matt Dolman from Dolman Law Group told WIRED that “I would assume by the end of September there should be about 100 to hundreds of these [lawsuits] pending, and I would assume by this time next year you'll probably be looking at over 1,000 of these filed”. He also says that “We alone already have about 300 of these cases.” Dolman says the vast majority of his clients are under the age of 16 and estimates around 60 percent of the cases involve girls. If anything, it seems like the problem is getting worse, not better.
Conclusion
RBLX is a pricy stock. Although the growth seems great, they are already approaching saturation in their most lucrative markets. They have been found to fudge their numbers, but will continue to do so since no one is stopping them. RBLX has never made a profit, and it will likely be very long until they do (if ever). Despite implementing new safety measures, sexual abuse on the platform seems to be more rampant than ever. The legal pressure of thousands of lawsuits is mounting on them.
Catalysts
- Missing growth targets
- Dilution of stock over time
- Financial misaccounting
- Lawsuits
Position
- RBLX Jun18'26 120 Put
TL;DR Hindenburg exposed RBLX fudging numbers in 2024. They have never made a profit; meanwhile, they are diluting their stock, and insiders are cashing out. Despite the current high growth, the room for future growth is very uncertain. The problem of sexual abuse and grooming on Roblox seems to be growing despite Roblox implementing new 'Safety Measures'. They are facing hundreds of lawsuits while trying to attract advertisers to advertise in-game.
