Roblox stock had its best day since November on Thursday, but that may not scare away short sellers betting on further price declines.
Shares of Roblox (ticker: RBLX) rose 19% to $28.58 in Thursday trading. The stock is still down 72% year to date and 78% from its record high of $134.72 on Nov. 19, according to Dow Jones Market Data. Shares were up as much as 29% Thursday. Some 94.8 million shares were traded, compared with a 65-day average of 26 million.
The stock’s jump followed Roblox’s earnings report on Tuesday night. Shares initially fell following the report, but surged in Wednesday’s session after the firm’s conference call that morning. Executives seemed upbeat that year-over-year growth in bookings—a form of adjusted revenue—was poised to improve in the coming months after bottoming in March.
The move Thursday caused some pain for short sellers betting on a price decline. Ihor Dusaniwsky, managing director at short selling analytics firm S3 Partners, told Barron’s via email that short sellers were down $146.4 million on Thursday’s action. S3 Partners estimates Roblox’s short interest at 31.74 million shares shorted, or 10% of shares available for trading.
Dusaniwsky told Barron’s via email he doesn’t see the two-day rebound for shares chasing away short sellers. He notes over the past week, Roblox saw 439,000 new shares shorted. Even with Thursday’s gain, short sellers betting against the stock were up $1.56 billion year to date.
“It is difficult to squeeze out a short seller who is still profitable after suffering a couple of days of losses,” Dusaniwsky said. “If the rally continues, we will see some short sellers covering all or part of their position to realize some of their profits, but today’s price move is mainly due to buy-side pressure and not a short squeeze,” Dusaniwsky added.
Such short sellers are betting against the firm’s growth prospects, especially amid a broader tech stock selloff. Roblox offers a platform that lets users design games and interact in user-generated virtual worlds. It’s popular among children and preteens, though its average user is getting older. Like many videogame firms, the company also faces tough growth comparisons from Covid-19 lockdowns.
The stock also benefited from the short-lived period of investor hype surrounding “metaverse” companies. To its credit, Roblox had been offering interactive online worlds well before Facebook’s Meta Platforms (FB) metaverse pivot. Earlier this week, an analyst suggested Walt Disney (DIS) acquire Roblox to help the firm’s gaming and metaverse efforts.
On the options side of things, Susquehanna Financial Group analyst Christopher Jacobson told Barron’s that though Roblox options remained active on Thursday, most of the flow was in very short-term options expiring this week. He pointed out in a note earlier Thursday that one trader did make a significant long-term bet on Wednesday by selling 20,000 puts with a $17.50 strike that expire in 2024 and buying a 2024 $30/$65 call spread. Though the trade would be successful if shares hit $30, the trader’s upside is limited at $65. The trader also faces downside if shares fall below $17.50.
Jacobson notes roughly 106 million shares traded on Wednesday, meaning the market wouldn’t have had much trouble digesting any hedging related to the trade.
“That being said, we can’t ignore the signaling/sentiment impact of a trade like that, with other investors perhaps seeing the trade as supportive of buying the shares,” Jacobson says.
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