Securities Class Action Claims Roblox Misled Investors by Failing to Disclose ‘Unsustainable’ Revenue Growth

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A proposed class action claims Roblox and its top executives artificially inflated the price of the company’s securities by knowingly misrepresenting its future revenue growth to investors.

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The 29-page lawsuit begins by explaining that the online gaming platform primarily generates revenue from selling virtual currency known as “Robux,” which users can purchase to spend on digital items like avatar upgrades, weapons, armor or vehicles. Roughly half of all Roblox users are under the age of 13, many of whom buy Robux with their parents’ credit cards, the case notes.

Beginning in March 2021, when Roblox made its public market debut on the New York Stock Exchange, the company reported strong revenue growth and “bookings,” a metric that represents the total cash generated from Robux sales in a given fiscal period and helps investors gauge its future revenue growth, the filing says. According to the suit, the defendants continued to tout the company’s growth metric in regulatory filings with the U.S. Securities and Exchange Commission (SEC), press releases, media reports and public statements made by its executives up until February 2022.

What Roblox failed to disclose, the case alleges, is that the company’s growth throughout this period was attributed to weak content controls and a lack of spending restrictions on its platform.

“These inadequate controls enabled younger Roblox users to play games with inappropriate content and make unauthorized Robux purchases which translated into unsustainable levels of bookings and revenue,” the complaint says.

According to the suit, Roblox planned to roll out new user controls in September 2021, allowing parents to place monthly spending limits on their children’s Robux purchases.

The complaint—which names as defendants Roblox’s Chief Executive Officer David Baszucki, Chief Financial Officer Michael Guthrie, Chief Business Officer Craig Donato and Senior Director of Product Policy Eliza Jacobs—claims the executives knew these spending restrictions would lead to a significant reduction in revenue. 

However, rather than warn investors about this imminent bookings deceleration, the defendants issued several statements throughout November 2021, including Roblox’s quarterly SEC report and Q3 2021 financial results press release, that touted “amazing user growth” and increases in user spending, the suit says.

The case shares that these representations caused Roblox’s stock prices to jump 42 percent on November 9, surging to a record high of $109.52 per share. Per the filing, Roblox’s executives quickly took advantage of these artificially inflated stock prices and sold millions of their shares of company stock for tens of millions in proceeds.

The truth about Roblox’s “unsustainable” growth finally came out on February 15, 2022 when the company’s Q4 2021 results revealed that it had failed to meet key metrics projected by analysts and experienced an overall slowdown in booking growth, the filing relays. Upon this news, the case says, Roblox stock fell 26.5 percent to about $53.87 per share.

Federal regulations require publicly traded companies to disclose “any known trends or uncertainties” that are reasonably likely to have an unfavorable impact on revenue or make investment in its securities “risky,” the case relays. The complaint contends that the defendants violated securities law by failing to reveal that their planned rollout of enhanced parental controls would have an unfavorable impact on the company’s financial results.

“As a result of [the defendants’] wrongful acts and omissions, and the resulting decline in the market value of Roblox’s stock,” those who purchased Roblox securities have suffered “significant losses and damages,” the complaint stresses.

The lawsuit looks to represent any person or entity that purchased or otherwise acquired Roblox Class A common stock between March 10, 2021 and February 15, 2022.

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