Block (NYSE:SQ) stock is plunging today after the release of a damning short report. Market research firm Hindenburg Research has published a detailed case against the digital payment company, accusing Block of orchestrating fraud against consumers and inflating user metrics to mislead investors.
Conducted over two years, the Hindenburg investigation concludes that Block has committed fraud against not only users but also the government. Allegedly, Block has attempted to pass off “predatory sources of revenue as technological breakthroughs.” The short seller also predicts a downside of between 65% and 75% for SQ stock. Shares have been falling all morning since the report’s publication, calling Block’s growth prospects into question.
What does this mean for Block and SQ stock shareholders? Let’s take a closer look at the report and what investors can expect as the dust settles.
What’s Happening With SQ Stock?
Led by former Twitter CEO Jack Dorsey, Block has enjoyed a reputation as a Silicon Valley darling since its days as Square and been touted for its potential as a leading blockchain stock. As noted, though, the short report is sending SQ stock into a nose dive this morning. As of this writing, shares are down more than 10% for the day. Although it has recovered slightly from earlier declines of more than 20%, SQ still has a long way to go before returning to previous levels.
That may be difficult, considering the dark shadow the Hindenburg report is casting over shares. Mullen Automotive (NASDAQ:MULN) has also not recovered since the short seller published a report on the company. In the Block report, Hindenburg is not any kinder.
Even before breaking down its case against SQ stock, Hindenburg picks apart the bullish case made by investors like Cathie Wood. The firm notes that even if investors completely disregard its findings, SQ stock’s considerable downside still makes it a highly risky play. And, if the actions alleged by Hindenburg are true, SQ stock could plunge much further. Per the report:
“Most analysts are excited about the post-pandemic surge of Block’s Cash App platform, with expectations that its 51 million monthly transacting active users and low customer acquisition costs will drive high margin growth and serve as a future platform to offer new products […] 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.”
It doesn’t stop there. Hindenburg’s team also notes that Block has embraced criminals as a core aspect of its client base. In the report, the firm compares the company’s compliance approach to the “Wild West.” According to Hindenburg, Block has a history of blacklisting accounts accused of illicit activity but not actually banning their users. The firm even notes the number of hip-hop songs that have mentioned Block’s Cash App, often in conjunction with crime.
However, the worst of the investigation’s findings is likely the misleading user metrics. Hindenburg accuses Block of obfuscating the data it has provided on Cash App’s user count, alleging that its “transacting active” metrics are full of duplicate and fake accounts.
What Comes Next?
As of now, neither Block or CEO Jack Dorsey have issued statements on the Hindenburg report. The downside potential noted by the research firm alone should make investors proceed with caution with SQ stock, however. What’s more, given the reports of misleading data and ties to criminal activity, the case against the company seems strong. If any of these accusations are found to be true, it will be hard for Block to bounce back.
On the date of publication, Samuel O’Brient 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.
