A prominent short seller claimed the popular video game platform Roblox is an “X-rated pedophile hellscape” and said the company is lying to investors about its numbers. Last week’s report from Hindenburg Research prompted a suicide prevention campaign to call on British regulators to do more to protect kids from harmful online content.
Hindenburg Research is a short seller that publishes reports on companies it thinks are overvalued or have bad business practices. It notably called out electric trucking startup Nikola for using “lies and deceptions” to secure a partnership with General Motors.
The allegations included pretending a truck prototype was powered and fully functional while deceptively showing it rolling down a hill. Nikola’s founder, Trevor Milton, was sentenced to four years in prison for deceiving investors who lost hundreds of thousands of dollars.
What is Roblox
Roblox launched in 2006 as a new type of educational software platform. Kids could make their own games using the provided assets and learn to code. It doesn’t use the normal video game business model to make money. It’s not a one-time purchase or a game that relies on a subscription model like “World of Warcraft.”
“Think of it like iOS as a platform, and anybody can build a game for that platform,” Wedbush Securities Analyst Michael Pachter told Straight Arrow News.
“And while you’re on the platform, you can wander from game to game,” Pachter added. “You can play the games. You can customize your appearance. And you can interact with your friends. You can interact with brands, so you can go into the Nike portal or the Burberry portal.”
Roblox’s popularity surged during the COVID-19 pandemic, and it went public in 2021. The company now boasts 79.5 million daily active users. It’s available pretty much anywhere you can play games.
In 2023, Roblox reported $3.5 billion dollars in bookings. And in the first 6 months of this year, it’s grown 20%, on track for $4.2 billion in bookings.
“The developers who build games for the Roblox experience publish their games on that platform. Roblox helps the developer to promote the game,” Pachter explained. “And while in the experience, there’s stuff to spend money on. The currency in the game is called Robux.”
“You might play the game, ‘Adopt Me.’ If you want a leash, you have to buy it to take your pet out. Or if you need food to feed your pet, you’ll buy it with Robux,” Pachter said.
“So the model for Roblox is, ‘We will allow you to put your game on the platform, and we will allow you to monetize. And if people spend Robux in your game, you get your share of those dollars spent. We’ll collect the dollars and we’ll keep somewhere between 30% and 70% of the revenue generated [that] goes to Roblox,’ depending on who drives traffic to the game,” Pachter added.
More than half of Roblox users are under the age of 17. Kids under 13 account for 42% of the user base. That’s why the child safety part of Hindenburg’s report is so important.
Hindenburg’s claims
Hindenburg claims Roblox is “lying to investors, regulators, and advertisers about the number of ‘people’ on its platform, inflating the key metric by 25-42%+.”
They also claim Roblox lied about engagement. Roblox says the average player spends 2.4 hours on the platform each day. Hindenburg says, “Engagement hours, another key metric, is inflated by an estimated 100%+.” But Pachter says there’s a big flaw in Hindenburg’s calculations.
“They concluded that the gameplay is 22 minutes a day, and they tracked across all games,” Pachter said of the report. “And then [as a] footnote, ‘We did not track time spent in other activities like customizing avatars or talking to friends.’”
“It’s idiotic not to measure that,” Pachter said.
“They never questioned bookings,” Pachter added. “Bookings are going up. Cash is going up. [Hindenburg] did question the number of users. And if we were to restate what Roblox reported last year, $3.5 billion from 68 million users, and use what Hindenburg says the right number is, then the average user, instead of generating $50 a year, generated $70. Do we care?”
In a statement, Roblox said, “The financial claims made by Hindenburg are misleading. The authors are short sellers and have an agenda irrespective of the substance of Roblox’s business model and results.”
“What matters to investors is revenue and cash flows and the revenue growth, whether or not you have as many users as you claim, or 20% fewer, is to me a little bit of noise,” Edwin Dorsey, the author of The Bear Cave Newsletter, told Straight Arrow News.
“I have mixed feelings about the inflated metrics,” Dorsey continued. “I personally don’t feel it’s as big a deal as maybe some people in the market think. And I don’t think it’s as big of a deal for the business as the child safety.”
Roblox and child safety
Hindenburg’s report claims Roblox, “is compromising child safety in order to report growth to investors.” Their research recounted nine situations where police caught predators using the platform. Meanwhile, Dorsey, who has been covering these Roblox issues since 2022, said he has detailed 14 instances.
“Unfortunately, [Hindenburg is] right, and they’re late, and they didn’t say anything that hasn’t been reported before,” Pachter said.
In July of this year, Bloomberg published a lengthy feature with the headline, “Roblox’s Pedophile Problem.” The piece detailed situations where prominent creators in the community used their influence to groom children.
“The Bloomberg article is thoughtful, well written, super well documented, and concludes that Roblox is spending $878 million per year, 25% of their $3.5 billion in bookings last year, and is generating 13,000 reported incidents in 2023,” Pachter said.
“Most of those incidents, the predators who reported, didn’t actually solicit sex or pornography from the kid,” he continued. “They tried to get the kid to go over to Discord or Snapchat because those aren’t monitored as well.”
Roblox says they’ve spent nearly two decades making it one of the safest online environments for its users, mostly kids. One mitigation technique Roblox uses is not allowing images in the chat feed. But a simple Google search provides a lot of videos showing you how to make images into emojis that can be used in chat.
When Bloomberg spoke with current and former employees, they detailed the gargantuan task of trying to moderate such a massive space.
“It just seems repeatedly like if Roblox moderation takes a step, it’s always the bare minimum step,” Dorsey said. “So before banning a game, they might just blur out the title. Before banning an account posting inappropriate stuff, they’ll just take down the inappropriate items. I think if you had a stricter enforcement mechanism against bad accounts and bad actors, that would help.”
Roblox also rejected these safety claims in the Hindenburg report.
“Roblox takes any content or behavior on the platform that doesn’t abide by its standards extremely seriously, and Roblox has a robust set of proactive and preventative safety measures designed to catch and prevent malicious or harmful activity on the platform,” the company’s statement reads.
The fallout
The Bear Cave has also detailed inappropriate nonsexual content on Roblox, including the reenactment of school shootings and the Holocaust. The Verge has also reported past reenactments of other mass shootings and Wired reported on Nazi role-plays on Roblox.
In the end, Dorsey thinks there are several ways the company can shore up these issues and make it safer for children.
“Unlike Instagram, Facebook and all these other social networks, you don’t need an email or phone number to sign up,” he said. “You can just sign up with a username and password. If you get banned, they have no way of enforcing that ban, because you can just make a new username and password.”
“I think the big underlying issue here is you can’t have it so 8-year-olds can chat freely with the rest of the internet,” Dorsey continued. “It’s fun, it’s cool if you’re a young kid, to be able to chat with all the strangers in the world. But as long as you have that, that is just an insurmountable huge risk that is always going to pose issues.”
While the legitimacy of Hindenburg’s allegations is still up for debate, its report is already being used to push for change. The Molly Rose Foundation was formed by the parents of British teenager Molly Russell, who took her life after viewing harmful online content.
“This report underscores the growing evidence that child safety shortcomings aren’t a glitch but rather a systemic failure in how online platforms are designed and run,” the organization’s CEO Andy Burrows said. “The Online Safety Act remains the most effective route to keep children safe, but such preventable safety lapses will only be addressed if Ofcom delivers a step-change in its ambition and determination to act.”
The Online Safety Act passed in 2023, but the U.K.’s Office of Communications, or Ofcom, is still tasked with creating codes to guide the law. That’s in the draft phase now.
“Platforms – such as Roblox – will be required to protect children from pornography and violence, take action to prevent grooming, remove child abuse images, and introduce robust age-checks,” Ofcom told the Guardian. “We have set out clear recommended measures for how they can comply with these requirements in our draft codes.”
A similar “Kids Online Safety Act” in the U.S. passed the Senate this summer, but free speech advocates worry it does too much to restrict legal speech. It’s a challenge the U.K. version also faced. Recently, the U.S. and U.K. announced a joint working group to tackle child online safety.
A Roblox spokesperson told Straight Arrow News the company fully intends to comply with the Online Safety Act.
Despite his skepticism about the subjects brought up in the Hindenburg report, Pachter says there could be a case to be made that Roblox is overvalued.
“I don’t think so, but there’s a case to be made,” Pachter said. “I understand why someone would say, ‘It’s trading at $40. It should be trading at $30.’ And so they thought, ‘If we expose them and people agree with us, then they’ll think it’s worth $30, it’ll go to $30, and we’ll make money on our short, we’ll make $10.’ But they picked the wrong things to criticize it for.”
