Should Roblox Investors Be Worried About the SEC Investigation Involving the Company?

Roblox (NYSE:RBLX) operates a hugely popular gaming platform that attracts millions of users every day. With a staggering 40 million games on Roblox, there's a ton of content out there to keep people coming back. It also has a ton of promise when it comes to monetizing its platform via ads.

Despite all this potential, however, it still carries plenty of risk for investors. The company isn't profitable. A recent short-seller report questioned how the company handled the matter of keeping kids safe on its platform. And the Securities and Exchange Commission (SEC) is investigating the business. Are investors better off avoiding Roblox stock?

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What is the SEC investigation about?

According to news reports last month, the SEC has an ongoing "active investigation" into Roblox. So far, no details regarding what that investigation is about have been made public, but it may have to do with a short-seller report that was released last year. In October, Hindenburg Research (which announced this year that it was shutting down) alleged that the gaming company not only inflated key metrics but also didn't do enough to protect the younger users on its platform. More than half of Roblox's users are under 16.

While Roblox denied the claims, it did roll out new safety tools just weeks after the report came out. And it may have taken some time, but the short report may have brought to light some issues that prompted the SEC to investigate. However, in the absence of official word from the regulator or news of any action, investors can only speculate about what the investigation is regarding.

All that said, for investors, the SEC's interest may not be the biggest cause for concern here.

Will Roblox ever turn a profit?

What worries me most about Roblox are its troubling financials. While the company has been growing rapidly, its losses continue to pile up. They have been north of $900 million in each of the past three years. Though it grew its revenue by 29% to $3.6 billion in 2024, the company's net loss shrank by just 19% to $935 million.

RBLX Net Income (Annual) data by YCharts.

As the business scales up, one would expect at least some progress toward profitability, but it isn't anywhere near breaking even on the bottom line. Generating more sales and increasing its number of active users are promising developments, but unless it can slim down its cost structure, its business model may not prove sustainable.

The one hope is that it will be able to build out a digital advertising platform that offers marketers unique, immersive ways to reach users. Such an ad business could lead to Roblox achieving better margins in the future. But when or if that will happen is anyone's guess.

Is Roblox stock a good buy right now?

The active SEC investigation involving Roblox is concerning. But given the lack of developments or consequences as a result of it at this point, it arguably shouldn't factor into investors' decisions about whether or not to buy the video game stock right now. The much bigger issue is that because the company lacks a clear path to profitability, shareholders are taking on significant risk, as management may need to issue debt or engage in dilutive secondary stock offerings to fund its future growth initiatives.

Roblox is an intriguing stock to watch, but until and unless the company shows some significant progress on improving its bottom line, I'd avoid buying it.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roblox. The Motley Fool has a disclosure policy.