Short sellers are getting a lot of airplay these days, especially the ones that can severely crumble a stock's price after releasing their reports upon announcing their short position. Many of these short seller reports may have valid data and reasoning that warrant a stock price sell-off, while many allegations are often unsubstantiated. Short sellers are very careful in selecting their words to avoid having their reports construed as investment advice or face libel charges.
However, the one fact that's common with every short seller report is the intent for them to trigger a sell-off in the underlying stocks so they can cash in their short positions on the price decline. Investors are often left in the wake of stomaching losses. However, the impact of the bear raids can often be temporary. Here are three stocks in the computer and technology sector that were targets of short sellers making recoveries.
Roblox: Accused of Inflating DAU Metrics
Hindenburg Research released a bearish short-seller report on October 8, 2024, accusing gaming platform Roblox Inc. (NYSE: RBLX) of overinflating user metrics to inflate the stock price for insiders to sell.
They point out that insiders sold $1.7 billion in stock since going public, with its CEO Baszucki personally selling $150 million of stock.
DAUs Aren’t People, But People Count as DAUs
The report claims Roblox is lying to investors and inflating its daily active users (DAU) by 25% to 42%. It points out that Roblox states that DAUs are not a measure of actual unique individuals accessing the platform. DAUs can be counted multiple times for accounts that a single person may run. Hindenburg claims there are numerous bot accounts and individuals with numerous accounts on the site, and the wording in Roblox's official investor communications swaps out "people" regularly with DAUs as in "over 54.1 million people are coming to Roblox every day".
This purposely gives the impression more people are coming to the site when DAU is not indicative of people but accounts. Hindenburg claims to have interviewed former employees who claim the real number of people on the site could be 30% less than its stated DAUs.
Some of its claims imply criminal behavior. Hindenburg also goes on to talk about rampant child predators on the platform and includes a number of incidences, even opening up accounts impersonating minors under 13 and being approached by adult predators. The attempt to imply financial, moral, and commercial shortcomings to drive investors to sell and drop the stock is evident.
Roblox Disputes Allegations and Stock Rebounds
The release of the short report initially caused RBLX shares to gap down in the pre-market on October 8, 2024, from $41.60 to a low of $36.09. Buyers stepped in quickly, causing shares to rebound back to $40.51 on the close and recover back above their closing price pre-report the following day. The impact of the report only lasted for a day at most. The company had a representative debunk the allegations on CNBC and left it as is.
Block: CashApp as a Money Laundering Tool by Criminals
Hindenburg released a short seller report on Block Inc. (NYSE: SQ) on March 23, 2023, implying fraud and criminal activity on its Cash App platform. Note the word "imply" as they hope to lead readers to believe that fraud was purposely being facilitated.
Hindenburg claims Block inflated user metrics to prop up the stock so insiders could sell over $1 billion of stock. The M.O. may sound familiar because Hindenburg regularly purports that companies are perpetrating pump-and-dump schemes so insiders can cash out their shares at artificially inflated prices.
Dozen of Interviews With Former Employees
As is often the case, Hindenburg claims to have interviewed a number of unnamed sources who were former insiders and employees. Hindenburg claims the Cash App was designed to cater to the "underbanked" criminal population, purporting that it's a regular tool used by drug dealers and criminals, as evidenced by its being referenced in hundreds of rap music and hip-hop songs. They also claim the user metrics are inflated and point out how easy it is to open multiple accounts.
Initial Drop and Rebound Felt in Days
The reaction was a 14.82% drop on the day of the report release as shares fell from its $72.61 the previous day, close to a low of $56.50 and close of $61.88, down $10.77 on the day of the release. Shares were able to rally back up to $70.53 five days following the report. Since then, Block has had multiple earnings releases that have caused the stock to fall as low as $38.85 on October 27, 2023, and rally as high as $86.17 on March 13, 2024. These days, the short seller report is long gone in the rearview mirror, but shares are trading around $70.
Super Micro Computer: Accounting Irregularities Implied and 10-K Filing Delay
On August 27, 2024, Hindenburg released a short seller report on AI server manufacturer Super Micro Computer Inc. (NASDAQ: SMCI), claiming accounting irregularities. Again, Hindenburg claims to have interviewed former senior employees and industry experts to determine self-dealing and accounting violations. This time, they would use actual charges made by the U.S. Securities and Exchange Commission (SEC) in August 2020 pertaining to over $200 million in improperly recognized revenue resulting in artificially inflated sales, earnings and profit margins.
The company settled with the SEC for $17.5 million. Hindenburg claims the company is back to its old antics, pressuring salespeople to inflate their sales to meet high quotas along with a slew of allegations. Super Micro denied the report and said it would address the allegations.
Super Micro Delays 10-K Filing
Whether by coincidence or not, Super Micro delayed their 10-K annual report filing the following day to perform an internal review, which caused shares to collapse by an additional 19%. Super Micro stated it didn’t expect any material changes to its fourth quarter as a result of the delay. It also executed a 10-for-1 stock split on October 1, 2024. Shares fell to a post-split low of $39.52 on the short seller report, but shares have recovered back to $47.80 since then.
