Block (SQ) is still being put in a square penalty box by Hindenburg Research.
Block stock fell another 2% in early trading on Friday, after falling 15% on Thursday, as Wall Street continued to sift through a new piece of short-seller research out of Hindenburg. The digital payments outfit remains a top five trending ticker on the Yahoo Finance platform.
Hindenburg Research levied accusations of fraud against the company, which was founded and led by billionaire Jack Dorsey.
The research accused Block of a "willingness to facilitate fraud against consumers and the government, avoid regulation, dress up predatory loans and fees as revolutionary technology, and mislead investors with inflated metrics."
Block hit back, but not as hard as investors wanted — which kept questions on the company's business swirling.
"We intend to work with the SEC and explore legal action against Hindenburg Research for the factually inaccurate and misleading report they shared about our Cash App business today. Hindenburg is known for these types of attacks, which are designed solely to allow short sellers to profit from a declined stock price. We have reviewed the full report in the context of our own data and believe it’s designed to deceive and confuse investors. We are a highly regulated public company with regular disclosures, and are confident in our products, reporting, compliance programs, and controls. We will not be distracted by typical short seller tactics," Block said in a statement.
Dorsey didn't return Yahoo Finance's request for comment. Hindenburg Research didn't reply to repeated attempts to discuss its new research.
Here is the vibe on Wall Street:
Truist analyst Andrew Jeffrey: "We have known Block's management team for years and have confidence in the way the [company] discusses, manages and discloses details about its Cash App business. While we think Cash App incurs some fraud, like any other P2P payments app, we find it highly unlikely that one of the most sophisticated FinTechs in the US is running rampant with systemic fraud. We also highlight that the majority of Cash App gross profit is generated by 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 verification of an SSN and/or drivers license. To our knowledge, it is not possible to gain access to the full functionality of Cash App by using a fake SSN. To the extent Cash App fraud exists, we think authentication requirements are enough to assure that core profitability is not materially impacted. In addition to fraud assertions, the negative piece repeats a well-trodden argument that the Durbin carve out for small banks will come under scrutiny. Any change to the Durbin exemption could adversely affect Cash App's interchange revenue. That said, we don't see policymakers eliminating the Durbin carve out because it would marginalize thousands of small [financial institutions] and the communities they serve. Despite the foregoing, we recognize that increased scrutiny of fraud at any neobanking platform may result in a review of business practices and could slow user growth. We contend this is materially reflected in yesterday's 15% sell off (SPX +30bp) and SQ's ~20x estimated 2024 EBITDA multiple."
Citi analyst Peter Christiansen: "We've read through the activist short-seller report alleging improper compliance standards as it relates to Cash App account establishment and ongoing fraud monitoring, among other items. While Block, like any other financial institution, cannot control what people do with their money, the report raises two important lines of questioning: (i) Are (or were) Cash App fraud/KYC controls up to both regulatory and industry standards; and (ii) if not, are Cash App's growth profile, revenue retention, and user engagement the result of a mass user perception that the platform has inadequate fraud/KYC controls (i.e. are lax fraud/KYC controls perceived as a product feature). Further, given Block's mission to serve the underserved, proportionality is also a highly relevant consideration. We had hoped Block's response/refutation would be more detailed and believe 'exploring legal action' will likely not be enough to settle investors' concerns."
Keybanc analyst Josh Beck: "In summary, we see no merit to the disparaging claims and rather view the report as observations from a relatively novice industry outsider who is not familiar 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 comparable to the broader technology universe. MAU were 51M exiting 2022, which are defined as a transacting active that has had at least one financial transaction using any product or service within Cash App, consistent with peers and other third-party data sources (that tend to only track app-based activity, not pure financial activity such as a card transaction). 2) Fees generated from sources such as interchange or instant deposit fees are standard industry practices. Cash App has ~18M card users, with a revenue model premised on interchange, a standard model across the financial services and FinTech industry. Instant deposit fees provide users with faster access to funds, an intrinsic money movement across the industry. 3) Block compliance processes are robust and consistent with industry standards. As a financial services provider, Block is subject to numerous laws and regulation including, but not limited to, payment regulation (e.g., registered with Treasury's FinCen), CFPB, AML (a collection of policies, procedures, reports and controls spearheaded by Block's chief compliance office) and clearly articulated acceptable use policy. We believe Block fully complies with applicable regulations and laws and prevents the maximal amount of fraud possible within a business that is inherently subject to, while not immune to, any instances of fraud, which is simply the reality of being a financial services provider as highlighted by the well-respected Nilson Report issue, which cited $32.3B of card fraud across issuers, merchants and acquirers in 2021."
Yahoo Finance's Ines Ferre contributed to this story.