Roblox Dips on Short Report—Here's Why It Could Bounce Back Fast

Every once in a while, a few stocks come under attack from short-selling firms or, essentially, by anyone that doesn't align with that stock's business or interests. It is tricky for retail investors to figure out whether short reports and attacks have any traction since they can often sound convincing enough to get people to sell – or even short – said stock.

Today, investors might be faced with the hard choice of whether to take a short report seriously for shares of the technology sector platform Roblox Co. RBLX, as they now are selling off by over 25% in the past week alone, or whether to consider this recent dip a potential buying opportunity to get the stock at a once-in-a-cycle valuation. To help investors decide which way to go, some of the key financials need to be analyzed for Roblox's business.

There are those on Wall Street and market participants who seem to think that Roblox is actually fine, despite what this new short report might claim. However, all evidence needs to be looked over, starting with the accusations against Roblox, before investors dig through the financial metrics that might uncover the truth about the company's situation today.

What This Firm Accuses Roblox Of: A Closer Look for Investors

Hindenburg Research, a short-selling firm famous for taking on short positions and writing bearish reports on companies it believes have a few weak points to exploit, has now written a piece on Roblox stock quoting that the firm has been lying to its investors about actual user numbers and profitability.

According to the report, Roblox fails to maintain safety and community standards for its audience, particularly underage users. While this may be the case, it is not a new trend in online platforms, a trend that essentially every player in the space is looking to work on and fix.

On a more company-specific issue, Hindenburg suggests that Roblox has misguided Wall Street and shareholders regarding how much it has actually grown its user base, overstating these figures by as much as double-digit percentage points, causing a divergence in earnings.

Surely, there are ways for companies to engage in "creative accounting" and overstate their net income and, therefore, earnings per share (EPS) figures. However, if investors can look at any one figure to check a business's true earning power, it is found in its cash flow statement.

Particularly in the cash from operations line item, which cannot be manipulated as easily as net income. More than that, free cash flow (operating cash flow minus capital expenditures) is often taken as the ultimate proxy for net income, and investors can look at the measure today for their reality check on Roblox stock.

Analysts Dismiss Short Report Claims: Why Roblox Stock May Still Be a Buy

Investors can look at the Roblox stock price action to lay the foundation for current sentiment. The fact that the stock rebounded just as quickly as it sold off tells investors that many participants came in to dismantle these false accusations.

More than that, Wall Street analysts have come in to reiterate their price targets on the stock just two days after the short report had been published. Those at Piper Sandler decided to reiterate their "Overweight" rating on Roblox, this time coupling that view with a $54 a share price target.

To prove these analysts right, Roblox stock would need to rally by as much as 30.7% from where it trades today, proving to investors that this short report might not have any factual significance for the company and its valuation. Here's what analysts might have looked at to arrive at their decision.

Within Roblox's latest quarterly earnings report, investors can check for the company's operating cash flows. The same quarter last year reported operating cash flows of $28.4 million, whereas the most recent quarter reported up to $151.5 million for a significant boost.

Free cash flow came in at $111.8 million when adjusted for capital expenditures, meaning Roblox has serious earning power that could not have been fabricated if what Hindenburg claims was true. On the way down, the report did get a few bears, putting on some short positions.

Roblox stock's short interest rose by 2.6% during the past month, which means those new short sellers might create more buying pressure on the stock's recovery. They need to buy back the stock to close down their short positions at a loss. Investors can look to institutional buyers to get one last sounding board for potential new upside from here.

Those at CWM decided to boost their holdings in Roblox stock by 61.7% as of October 2024, bringing their net investment up to $3.3 million today. This might not 100% disprove the Hindenburg report, but the evidence does stack in favor of Roblox making it out alright from this situation.

The article "Roblox Dips on Short Report—Here's Why It Could Bounce Back Fast" first appeared on MarketBeat.