Block (SQ) is still put in a square penalty area by Hindenburg Research.
Block shares fell another 4% in premarket trading on Friday after falling 15% on Thursday as Wall Street continued to sift through a fresh piece of short seller research by Hindenburg. The digital payments company remains a top 5 trending ticker on the Yahoo Finance platform.
Hindenburg Research raised allegations of fraud against the company, founded and run by billionaire Jack Dorsey.
The study accused Block of “a willingness to facilitate fraud against consumers and the government, avoid regulation, disguise bootleg loans and fees as disruptive technology, and mislead investors with inflated metrics.”
Block hit back, but not as hard as investors wanted — which kept questions swirling about the company’s business.
“We intend to work with the SEC and consider legal action against Hindenburg Research over the factually inaccurate and misleading report they shared today about our Cash App business. Hindenburg is known for these types of attacks, which are aimed solely at allowing short sellers to take advantage of a falling stock price. We have reviewed the full report in conjunction with our own data and believe it aims to mislead and confuse investors. We are a highly regulated public company with regular disclosures and are confident in our products, reporting and compliance programs and controls. We will not be sidetracked by typical short-seller tactics,” Block said in a statement.
dr Greg Werner poses for a photo with his Square (now Block) credit card reader at his office in New York on January 5, 2015. (AP Photo/Seth Little, file)
Dorsey did not respond to Yahoo Finance’s request for comment. Hindenburg Research did not respond to repeated attempts to discuss his new research.
Here’s the mood on Wall Street:
Truist Analyst Andrew Jeffrey: “We have known Block’s management team for years and have confidence in the way they [company] discusses, manages, and posts details about its Cash App business. While we believe Cash App is subject to some fraud like any other P2P payment app, we find it highly unlikely that one of the most sophisticated fintechs in the US is running systemic fraud. We also highlight that the majority of Cash App’s gross profit is generated from Cash Card (5x gross profit $), which requires a legitimate bank account. While anyone can order a card, it still needs to be authenticated like any bank card – including verifying a social security number and/or driver’s license. To our knowledge, it is not possible to access the full functionality of the Cash App with a fake SSN. To the extent that Cash App scams exist, we believe the authentication requirements are sufficient to ensure core profitability is not significantly impacted. In addition to the fraud allegations, the negative article reiterates a well-worn argument that the Durbin spin-off will be under scrutiny for small banks. Any change to the Durbin Exception could adversely affect Cash App’s interchange revenue. However, we don’t see policymakers eliminating the Durbin spin-off because it would marginalize thousands of little ones [financial institutions] and the communities they serve. Notwithstanding the foregoing, we recognize that increased investigation into fraud on any neobanking platform could lead to scrutiny of business practices and slow user growth. We contend this is materially reflected in yesterday’s sell-off of 15% (SPX +30bp) and SQ’s ~20x estimated 2024 EBITDA multiple.”
The story goes on
Citi analyst Peter Christiansen: “We read through the activist short seller report which alleges improper compliance standards relating to, among other things, Cash App account setup and ongoing fraud monitoring. While Block, like any other financial institution, cannot control what people do with their money, the report raises two key questions: (i) Are (or were) Cash App fraud/KYC controls compliant with both regulatory and industry standards and (ii) if not, is Cash App’s growth profile, revenue retention and users engagement the result of a mass user perception that the platform has inadequate fraud/KYC controls (i.e. lax fraud/KYC controls are perceived as a product feature). ). We had hoped that Block’s response/rebuttal would be more detailed and believe that “taking legal action” is unlikely to be enough to address investors’ concerns.”
Keybanc Analyst Josh Beck: “In summary, we see no value in the derogatory claims and view the report more as observations from a relatively inexperienced industry outsider who is unfamiliar with standard operating practices and principles within the FinTech industry or the broader regulatory construct. 1) Key metrics related to Cash App are defined in a logical way that is comparable to the broader technology universe. MAU were 51 million exiting 2022, defined as transaction actives who have completed at least one financial transaction using any product or service within Cash App, consistent with competitor and other third-party data sources (which tend to track only app-based activity, not purely financial activity like a card transaction). 2) Fees generated from sources such as interchange or instant deposit fees are standard industry practices 18 million cardholders, with a revenue model based on interchange, a standard model across the financial services and fintech industry faster access to funds, an intrinsic movement of money across the industry. 3) Block compliance processes are robust and in line with industry standards. As a financial services provider, Block is subject to numerous laws and regulations including, but not limited to, Payments Regulations (e.g. registered with the Treasury Department’s FinCen), CFPB, AML (a set of policies, procedures, reports and controls spearheaded by Block’s Chief Executive become). Compliance Office) and a clearly articulated acceptable use policy. We believe Block fully complies with applicable regulations and laws and prevents the highest possible level of fraud in a company that is inherently vulnerable but not immune to fraud, which is simply the reality of a financial services firm, as highlighted in the respected edition of the Nilson report revealing $32.3 billion in card fraud
Yahoo Finance’s Ines Ferre contributed to this story.
Brian Sozzi is the Editor-in-Chief of Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on the banking crisis? Email [email protected]
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