Did Insider Trading Foretell Roblox's Q3 Earnings Tumble?

The share price of Roblox Corporation closed at $30.92 on November 9th this year, down 21% from a closing price of $39.14 the previous day, presumably due to that day's announcement of missed earnings expectations. Analysts had expected a loss of 32 cents a share, but the loss came in at a much higher 50 cents. An interesting trade last month from founder and CEO David Baszucki might have predicted such a development - we will let you be the judge.

Roblox is an online, multiplayer game targeting mostly children where players compete in various community-made virtual areas. Players can purchase the in-game currency called Robux and exchange it for accessories for their avatar.

Thanks to the fortunate timing of a global lockdown, the share price of Roblox initially traded upwards following its March 2021 IPO, peaking at over $134 in November of last year along with the rest of the market. The stock has trickled downward since then and now stands at close to $32. As shown by recent financials, increasing revenue has not been able to contain ballooning costs. While Q3 revenue has gone up by 2% from a year ago, total costs are up over 39%. Research and development costs alone are up over 70%. All of this has added up to a 50 cent loss per share in the quarter, up from a 13 cent loss per share a year ago. The numbers are even starker when looking at the 9 months ended Q3 figures which show a $1.07 per share loss. The Results of Operations are shown below.

As indicated to shareholders, Roblox management's main goal is trying to attract more users between the ages of 17 to 24 to the platform. Management claims these users represent 22% of the platform and spend more money in app than younger players. As someone who was in the 17-24 age group just a few years ago, I personally don't see how the game could appeal to gamers of that cohort but perhaps management knows something I don't. Maybe this is where all of the R&D funds are going.

Now let's look at the trading activity of Roblox's top executives. We note that Mr. Baszucki is the sole controlling party of the company, owning over 70% of voting rights through control of class B shares that are not available for sale to retail. We will take a look at Mr. Baszucki's trading activity, but first let's examine the activity of all officers besides Mr. Baszucki.

First, we notice there are no purchases, only sales. This is not too unusual however, as insider sales outnumber purchases at a ratio of 3 to 1 in general.

Secondly, we see that Roblox officers made significantly more sales as the stock price was peaking in November 2021. We have written before about the factors that give insiders the ability to make such trades that show exceptional timing, and have described similar activity with both Meta Platforms and Snap, Inc. insiders. Roblox insiders appear to possess the same ability.

Now let's take a look at Mr. Baszucki's trades since the Roblox initial public offering.

We see Mr. Baszucki has been very selective in making trades, only selling on a handful of trading days total. Additionally, we see Mr. Baszucki has shown very strong market timing in making his few sales. Apart from the sales right at the IPO, Mr. Baszucki's sales have been followed by immediate dips in the stock price. I show this on the chart below.

We see Mr. Baszucki appears to exhibit the same market timing ability as the rest of the insiders, though he is perhaps the most prescient, selling nearly a million shares as the stock price peaked in November 2021. 

But what about the most recent trade, which appears to not be followed by a clear, immediate dip in the stock price? That bar refers to trades made on August 23rd of this year, when Mr. Baszucki exercised options to purchase 550,000 shares at an exercise price of $0.075 and immediately sold them at the market price of $41.41. Mr. Baszucki also sold an additional 100,000 shares at the market price on that day. In total, the shares sold on this day represented nearly $27 million.

While there wasn't an obvious dip in the stock price following this trade as there was with past trades, there was the lower-than-expected Q3 earnings announcement, which dipped the stock 21% on November 9th, the day of the announcement. The stock would then make a 19% recovery over the next two trading days to close out the week. This movement can be seen in the price chart shown below.

It is possible Mr. Baszucki had these dismal Q3 earnings in mind when he made these trades, though only he knows if that was truly the case. Regardless, traders and analysts may benefit from keeping a closer eye on the selling activity of Mr. Baszucki, especially the next time he moves to exercise and liquidate large amounts of shares in a single trading day.

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