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No other short-seller can muster the clout that Hindenburg Research currently commands. After taking on entire countries, the research house has acquired an aura of impregnability and a reputation for extracting the proverbial pound of flesh from its targets. Today, the short-seller has trained its sights on Jack Dorsey’s financial services and mobile payments company, Block (previously known as Square).
NEW FROM US:
Block—How Inflated User Metrics and "Frictionless" Fraud Facilitation Enabled Insiders To Cash Out Over $1 Billionhttps://t.co/pScGE5QMnX $SQ
(1/n)
— Hindenburg Research (@HindenburgRes) March 23, 2023
In its detailed report, Hindenburg Research has alleged that predatory loans and fees constitute Block’s modus operandi. Block’s Cash App platform has 51 million monthly transacting active users. However, the research house believes that the company has overstated its user base while understating customer acquisition costs, with some former employees alleging that as much as 40 to 75 percent of the accounts that they reviewed were “fake, involved in fraud, or were additional accounts tied to a single individual.”
In what amounts to a particularly troubling allegation, Hindenburg Research believes that Block’s “Wild West” approach to compliance makes it easy for criminals and bad actors to perpetrate fraud or commit identity theft. In instances when an account was flagged for fraudulent activity, Block simply blacklisted the account without banning the user.
Taking it a step further, we ordered a Cash Card under our obviously fake persona, checking to see if Block’s compliance would take issue.
We promptly received our Donald J. Trump Cash Card in the mail. (16/n) pic.twitter.com/51udy2chdF
— Hindenburg Research (@HindenburgRes) March 23, 2023
Hindenburg Research alleges that it was easily able to make accounts on Block under the names of famous personalities, such as Donald Trump and Elon Musk. Apart from facilitating fraudulent activity related to COVID-relief cheques, Hindenburg Research believes that Block avoids “interchange fees” by routing its payments through a small bank while charging merchants elevated fees.
As far as Hindenburg Research’s financial projections on Block are concerned, the short-seller notes:
“Block reported a 1% year over year revenue decline and a GAAP loss of $540.7 million in 2022. Analysts have future expectations of GAAP unprofitability and the company has warned it may not be profitable.”
Despite this lack of profitability, Hindenburg Research alleges that Block is valued as a profitable growth company:
“Block is valued like a profitable growth company at (i) an EV/EBITDA multiple of 60x; (ii) a forward 2023 “adjusted” earnings multiple of 41x; and (iii) a price to tangible book ratio of 13.1x, all wildly out of line with fintech peers.”
As a punchline, the research house believes that Block shares have a downside of between 65 and 75 percent. At the time of writing, Block shares are down around 16 percent in pre-market trading.
Of course, we now await a rejoinder from Square on today’s allegations, a veritable rite of passage where Hindenburg Research is concerned.
As noted previously, the short-seller wrecked the personal fortune of Mukesh Ambani, one of India’s richest persons, earlier this year when it alleged widespread accounting fraud at many of the entities within the Adani Group. Adani has dropped to the 21st spot on Bloomberg’s Billionaires Index after a widespread rout in the shares of his companies. Before Hindenburg’s attack, Adani was ranked in the top five category of this august index.
Hindenburg Research also briefly took a short position on Twitter during Elon Musk's takeover saga.
Update: Here are Some of the Reactions to Hindenburg Research's Short Report Against Block
All socials have fakes, bots, scams, phonies, inactives, etc. and I’m sure all of them report them in their user metrics. pic.twitter.com/WynDDBFiVD
— Heisenberg (@Mr_Derivatives) March 23, 2023
Some people think that bots and fake accounts plague almost every social media platform and so should not pose any material downside risks.
https://twitter.com/markflowchatter/status/1638892859427266560
Baird has come out in favor of Block, while noting with "concern" the alleged prevalence of criminal activity on the platform.
Cathie Wood will need her rosary while in front of her screens today. $SQ is 6.2% of NAV at $ARKK & $COIN is 7.5%.
These 2 positions alone are now causing $195m in losses (-2.6% of $ARKK NAV). https://t.co/26l2EdEWxq
— Motorhead (@BradMunchen) March 23, 2023
There is also quite a lot of focus on Cathie Wood's ARK Invest which holds a significant stake in Block and Coinbase. Both stocks have tumbled today.
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