With the scathing Hindenburg Research report making its rounds on Wall Street, there may not be a better time to see which investors have long-term faith in Block (NASDAQ:SQ) stock.
Indeed, the notorious short-selling research firm has identified the credit card payment company as potentially grossly overvalued. According to Hindenburg, analysts overestimate the company’s historically strong margin growth as well as its monthly transacting active users. Hindenburg essentially accused Block, formerly Square, of misrepresenting its active user tally, equivalent to fraud.
“Our research indicates, however, that Block has wildly overstated its genuine user counts and has understated its customer acquisition costs. Former employees estimated that 40%-75% of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual.”
Block, however, has been quick to deny the allegations. In a five-sentence response, Block both refuted Hindenburg’s accusations, as well as laid out plans to pursue legal action against the bearish research firm.
Reasonably so, a number of investment banks have come out of the woodwork to defend SQ in the wake of Hindenburg’s report. This includes the likes of Truist (NYSE:TFC), which noted that it’s “highly unlikely that one of the most sophisticated FinTechs in the US is running rampant with systemic fraud.”
SQ stock has shed more than 18% following the release of the report. That said, SQ’s investor base remains strong. Who still has their hat in Block’s ring?
3 Investors Betting Big on SQ Stock
1. Cathie Wood’s ARK Investment
Despite Hindenburg’s harsh depictions of the payment transaction company, investors are relatively steadfast. In fact, just today ARK Investment Fund Manager Cathie Wood opted to purchase more of the fintech winner.
Block is actually one of Wood’s top holdings by fund weight. Yesterday the high-growth investor added more than 58,000 shares of SQ to her flagship ARK Innovation ETF (NYSEARCA:ARKK), as well as 9,431 shares to the ARK Next Generation Internet ETF (NYSEARCA:ARKW).
2. Mizuho Securities Analyst Dan Dolev
Next up is Mizuho Securities analyst Dan Dolev. Dolev believes SQ is still strong, despite some merit of the Hindenburg report.
“While the report makes valid arguments, such as the slowdown in inflows and sustainability of the instant deposit fees, which might increase regulatory scrutiny, other claims & risks around high, unregulated interchange fees and definition of monthly users are well known to investors. Other aspects of the report, like making inferences from songs or adding back SBC after SQ publicly shifted focus to include non-cash expenses in operating income, may hold less water. As a reminder, the near-term bull case on SQ remains reaching better than expected profits helped by cost control. The long-term bull case remains creating a unique B2B2C closed-loop payments network by connecting merchants and consumers.”
Dolev maintains the firm’s “buy” rating, with a price target of $93 per share, currently well above its current roughly $60 level.
3. KeyBanc Capital Markets
KeyBanc Capital Markets rounds out the list. The firm has long been a backer of SQ, and it doesn’t appear Hindenburg’s latest report is changing that.
“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,” said Keybanc analyst Josh Beck. The firm rates Block as “overweight” with a $100 price target to boot.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.