## 3 Stocks Targeted by Short Sellers Making Strong Recoveries: Roblox, Block, and Super Micro Computer
Short sellers have become a prominent force in the stock market, often generating significant media attention when they release reports alleging misconduct that can severely impact a company’s stock price. These reports, while sometimes based on valid data and reasoning, frequently contain unsubstantiated claims. While short sellers carefully craft their reports to avoid legal issues like investment advice or libel, their primary objective remains the same: triggering a sell-off to profit from the subsequent price decline.
While investors often suffer losses in the wake of these ‘bear raids,’ the impact can be temporary. This article focuses on three companies in the computer and technology sector that were targeted by short sellers and ultimately saw their stock prices rebound. Let’s delve into each case, exploring the accusations, the companies’ responses, and the subsequent recovery of their share prices.
### Roblox: Accused of Inflating DAU Metrics
On October 8, 2024, Hindenburg Research published a bearish short-seller report on gaming platform Roblox Inc. (RBLX), accusing the company of inflating user metrics to artificially inflate the stock price for insider benefit. Hindenburg highlighted that insiders, including CEO Baszucki, had sold a significant amount of stock since Roblox’s initial public offering (IPO), totaling $1.7 billion. This fueled suspicions that insiders were aware of potential issues with the company’s performance.
The report claimed Roblox was misleading investors by exaggerating its daily active users (DAU) by 25% to 42%. Hindenburg pointed out that Roblox itself acknowledged DAUs were not a measure of actual unique individuals, but rather included accounts potentially accessed by the same person multiple times. Hindenburg alleged numerous bot accounts and individuals with multiple accounts on the platform, arguing that Roblox’s investor communications deliberately blurred the line between ‘people’ and ‘DAUs,’ creating a misleading perception of user growth. Hindenburg even claimed to have interviewed former employees who suggested the actual number of unique individuals using the platform could be 30% lower than the reported DAU figures.
Adding to the accusations, Hindenburg claimed rampant child predator activity on Roblox, providing several examples and even opening accounts impersonating minors to highlight the issue. This tactic aimed to further erode investor confidence by associating Roblox with ethical and safety concerns.
Following the report’s release, Roblox’s stock price initially plummeted in the pre-market, but buyers quickly stepped in, leading to a rebound by the close. The stock recovered above its closing price prior to the report the following day, demonstrating the short-term nature of the impact. Roblox officially refuted the allegations on CNBC, maintaining its stance on the company’s performance and user metrics.
### Block: CashApp as a Money Laundering Tool by Criminals
Hindenburg’s report on Block Inc. (SQ), released on March 23, 2023, focused on the company’s Cash App platform, alleging fraud and criminal activity. The report, although using the word ‘imply’ to avoid direct accusations, aimed to lead readers to believe that Block knowingly facilitated criminal activity. Hindenburg claimed Block inflated user metrics to inflate the stock price, allowing insiders to sell over $1 billion worth of shares. This allegation aligns with Hindenburg’s frequent claims that companies engage in ‘pump-and-dump’ schemes, artificially inflating prices to cash out before the bubble bursts.
Hindenburg claimed to have interviewed numerous unnamed former insiders and employees, who alleged that Cash App was specifically designed to cater to ‘underbanked’ criminal populations, suggesting it was widely used by drug dealers and criminals. The report cited references to Cash App in rap and hip-hop songs as evidence of its association with criminal activity. Additionally, Hindenburg argued that user metrics were inflated due to the ease of opening multiple accounts on the platform.
The report resulted in a significant drop in Block’s stock price on the day of its release, but the stock rebounded within five days. Subsequent earnings releases have led to fluctuations in Block’s share price, with the stock reaching both lows and highs since the short seller report was published. The short seller report’s impact has largely faded, with Block’s share price currently hovering around $70.
### Super Micro Computer: Accounting Irregularities Implied and 10-K Filing Delay
On August 27, 2024, Hindenburg released a report on AI server manufacturer Super Micro Computer Inc. (SMCI), alleging accounting irregularities. The report claimed to have interviewed former senior employees and industry experts, concluding that Super Micro had engaged in self-dealing and violated accounting rules. Hindenburg cited charges made by the U.S. Securities and Exchange Commission (SEC) in 2020, which alleged Super Micro had improperly recognized over $200 million in revenue, resulting in artificially inflated sales, earnings, and profit margins. Super Micro had settled with the SEC for $17.5 million.
Hindenburg accused Super Micro of returning to its alleged fraudulent practices, claiming pressure on sales personnel to inflate their sales figures to meet unrealistic quotas. Super Micro, however, denied the report and vowed to address the allegations.
Following the report’s release, Super Micro delayed its annual report filing (10-K) for an internal review, further exacerbating the negative sentiment and causing a significant drop in the stock price. The company stated that the delay would not impact its fourth-quarter results. Super Micro also executed a 10-for-1 stock split on October 1, 2024. Despite the initial sell-off, Super Micro’s stock has recovered since the report’s release, indicating a potential resilience in the face of short seller pressure.
These cases demonstrate the impact of short seller reports on stock prices, highlighting the importance of considering multiple perspectives when evaluating investment opportunities. While short sellers can expose genuine issues within companies, their reports should be scrutinized carefully, considering their inherent bias and the potential for unsubstantiated claims. Investors should conduct thorough research and due diligence before making any investment decisions.
