Roblox Short Sellers Pull Out After 100% Stock
(Bloomberg) – The incredible rally of Roblox Corp. forced short sellers to pull out as optimistic investors piled into its shares amid a surge in users of its video game platform.
Roblox has nearly doubled since mid-May, ending a six-month losing streak. This fueled a retreat by the bears who had bet against the stock. The shorts recently trimmed their Roblox positions, buying 876,000 shares, worth $42 million, in the past 30 days, according to S3 Partners.
While many tech stocks have seen big gains on the market rebound over the past two months, Roblox stands out because the company was a poster boy for the metaverse frenzy that gripped Wall Street in late 2021. The stock tumbled as investors fled risky assets. this year, but now it is outperforming its peers, beating every member of the tech-heavy Nasdaq 100 index since the benchmark hit a low in June.
This volatility is likely here to stay for a while: short sellers are always betting that the losing company will struggle to build a profitable business anytime soon, while backers such as the guru of growth stocks Cathie Wood’s Ark Investment Management sees it as a big player in the metaverse, digital worlds where users can socialize, play games and conduct business.
“There is obviously a kind of war between the long term and the short term,” Gal Munda, an analyst at Wolfe Research, said by telephone. He threw a blanket on the stock on Wednesday with the equivalent of a holding note, saying Roblox’s pandemic-driven growth is cooling and the metaverse is still at least five years away for the company.
Roblox’s platform caters to tweens and teens, who play games on the site for free. The company earns revenue when users purchase Robux, a virtual currency with which they make in-game purchases. But it aims to build a virtual world that features events such as a 50,000-person virtual concert with audio and simulated video.
The company announced second-quarter bookings last week that missed analysts’ estimates, but analysts grabbed a rebound in July. At least 14 brokers, including Morgan Stanley, Citigroup Inc. and JPMorgan Chase & Co. raised their price targets after the results.
“The market thinks the Q2 misfire was a short-term setback,” said Tejas Dessai, an analyst at Global X, an exchange-traded fund manager that sees Roblox as the largest holding in its video game ETF and ports. The quarter “had a lot of positives,” he said.
While Roblox shares are still down 55% for the year, investors like Wood have continued to pile in. His ARK Innovation ETF has steadily increased its position, buying about 147,000 shares this month.
This puts additional pressure on short sellers, who borrow shares and sell them back, hoping to buy them back at a lower price to profit from the difference. When the stock goes up, they close their positions to limit their losses.
“If Roblox’s stock price is reinvigorated and breaks past the March highs, we could see the rally continue in earnest and eliminate even more shorts from their trades,” according to Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners.
The majority of analysts covering the stock also remain optimistic about Roblox’s long-term prospects, with 15 analysts giving it a buy rating, nine holding and two saying sell. The San Mateo, Calif.-based company, which went public in March 2021 at $45 per share, is trading around that level on Thursday.
The bearish case is that Roblox may never again see the kind of growth it enjoyed when much of the world was locked down, and the metaverse could turn out to be a fad that doesn’t live up to its boosters’ hopes. And in the short term, the United States could be heading into a recession, which would lead to a decline in consumer spending in general.
“Excitement around the Roblox metaverse will continue to be muted until further technological advancements are made,” Munda wrote in his report this week.
Technical table of the day
Only four of the 44 constituents of the Roundhill Ball Metaverse ETF are down from its June 16 low, with Cloudfare Inc., Roblox and Coinbase Global Inc. leading the pack. The group is up 26% over the period, outperforming the 21% rise in the Nasdaq 100.
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