Can the Roblox share price regain confidence after allegations of misconduct?

Not only did the online gaming platform miss earnings estimates, but shares in Roblox were punished further after a report from short-selling newsletter The Bear Cave alleged the company had compromised children’s safety. However, there are some analysts who still stand by its management.

Roblox [RBLX] is under fire, but it has a loyal set of investors that still believe in the company, such as wealth and investment management firm Gerber Kawasaki.

“There’s always some activists lurking around for a quick profit. While there’s a lot of value in having a different perspective if the company is run to the detriment of shareholders, I just don’t believe Roblox is there,” managing partner Hatem Dhiab told Opto. The firm has a small but growing investment in Roblox shares.

The gaming company has come under fire after The Bear Cave, a short-selling newsletter founded by Edwin Dorsey, posted a report on alleged widespread paedophilia, child abuse and illegal gaming on the platform.

The accusations are incredibly serious and include current and former employees being linked to “a wide array of misconduct”. According to the report, Roblox’s “former social media manager ran a pornographic blog while employed by the company”, and “major Roblox developers have been banned after being exposed for paedophilia”.

Facing criticism

Dhiab believes that dealing with these rumours is important. “They [Roblox] don’t want to become FB [Meta Platforms], where parents see it as a threat. As a result, they need to tackle any of these allegations with utmost importance, increasing their moderation tools and budgets for safety.”

The report also alleges that “[Roblox] has engaged in litigation and intimidation to help conceal allegations of paedophilia on the platform”.

The online games platform told Benzinga that The Bear Cave report presented “a wholly misleading, false and irresponsible picture of how our platform and company function”, adding that it had “zero tolerance for inappropriate content and behaviour” in its social spaces.

Roblox has said that it has asked The Bear Cave’s founder Dorsey for the research behind the report, which it plans to hand over to federal authorities.

Following the report’s publication, Roblox’s stock price plummeted 8.3% on 3 February and went on to end the month down 23.8%.

Regulations on playtime

Video games and the amount of time children play on them has always been a contentious issue, though. In the US, two senators proposed a bipartisan bill earlier this year that would require companies like Roblox to put in place better parental controls.

The Kids Online Safety Act (KOSA) would require online platforms to provide parents of children under 16 with tools to limit screen time and ban certain content, refrain from promoting harmful behaviour and publish an annual report of potential risks to minors.

The Chinese government has gone even further, introducing restrictions that mean those under the age of 18 can only play between 8pm and 9pm on Fridays, weekends and public holidays.

According to Wired magazine, the impact of the restrictions from Beijing was “relatively mild” for gaming stocks as children aren’t a major source of revenue for video game companies. Longer-term, that means video games play a less important role in entertainment consumption as today’s child gamers become adults, leading to the industry shrinking in the region.

For example, Tencent’s [0700.HK] share price dropped in early September 2021 after the restrictions came into force, before regaining most of those losses by mid-October. A bigger problem for gaming stocks seems to be inflationary fears and the ongoing conflict in Ukraine, which are pushing investors away from growth stocks, with Tencent’s stock falling 36.6% in the past month (through 15 March).

Is Roblox in danger of losing market share?

At the peak of the coronavirus pandemic, Roblox reported a huge rise in user growth, surging 90% in the third quarter of 2020. However, by the same quarter in 2021, user growth had slipped to 31%. The danger is that the scandal could see a further slowdown in growth.

That could benefit other companies looking to stake their claim in the metaverse. Facebook owner Meta Platforms [FB] is investing billions to realise its ambition to transition from a social media company to one that leads the metaverse. Unity Software [U], which allows developers to build the online worlds needed for the metaverse, could also benefit from problems at Roblox.

While Roblox’s share price fell after The Bear Cave report, a more meaningful impact on the stock has been fourth-quarter earnings, published on 15 February, which missed top and bottom-line expectations. Roblox posted revenue of $770m in the fourth quarter, falling short of the expected $772m. Earnings came in at a loss of $0.25, versus an expected loss of $0.13. Roblox shares plummeted more than 26% following the miss and have continued a downward trajectory since, closing down 50% on 14 March.

Gerber Kawasaki sees potential in Roblox

Despite the sharp selloff in the stock since the start of the year — shares in Roblox have declined by 64% in the year to date (through 14 March) — Dhiab of Gerber Kawasaki said that its future prospects look good.

Its share price had ballooned in 2021 but has since come off its highs as investors churn from growth to value stocks. When the cycle reverses, Roblox will climb again, Dhiab believes.

Roblox’s efforts to ‘age up’ its user base as its “over 13 cohort is growing and will spend more time on the platform”, continued investment in R&D, and year-over-year growth in daily active users and hours engaged, which demonstrate the “stickiness of the platform” will be key to its success, he added.