Block stock chopped as Hindenburg goes short: Where next for SQ stock?
Joshua Warner March 24, 2023 4:19 AM
Block shares have plunged after a short-seller accused the company of facilitating criminal activity and inflating its figures.
Hindenburg goes short on Block
Block, the company formerly known as Square, closed down 15% yesterday after investment research firm Hindenburg Research revealed it is short on the stock as it published a report that has made a wave of allegations against the payments company.
‘Our 2-year investigation has concluded that Block has systematically taken advantage of the demographics it claims to be helping. The “magic” behind Block’s business has not been disruptive innovation, but rather the company’s 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,’ the report claims.
The accusations would be seismic if true. Hindenburg claims Block has ‘widely overstated its genuine user counts and has understated its customer acquisition costs’ and goes as far to say that it has embraced criminals and facilitated illegal payments. It also describes its acquisition of Buy Now, Pay Later firm Afterpay as ‘flopping’ and says Block’s valuation is far too high compared to its fintech rivals, especially as competition is becoming more fierce.
‘In sum, we think Block has misled investors on key metrics, and embraced predatory offerings and compliance worst-practices in order to fuel growth and profit from facilitation of fraud against consumers and the government,’ Hindenburg summarized.
‘We also believe [CEO] Jack Dorsey has built an empire—and amassed a $5 billion personal fortune—professing to care deeply about the demographics he is taking advantage of. With Dorsey and top executives already having sold over $1 billion in equity on Block’s meteoric pandemic run higher, they have ensured they will be fine, regardless of the outcome for everyone else,’ Hindenburg said.
You can find the Hindenburg report here.
Block explores legal action against Hindenburg
Block, which is built on its Square payments service for merchants and its Cash App mobile payment system, released a response to the report and said it intends to work with the Securities & Exchange Commission and ‘explore legal action against Hindenburg Research for the factually inaccurate and misleading report they shared about our Cash App business’.
‘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,’ Block said in a statement.
Notably, short interest on Block stands at 5% of its free float and short sellers betting against Block have made over $400 million in paper profits since the Hindenburg report was released, according to data from Ortex reported by Reuters.
‘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,’ the company added.
Block stock: Should investors be worried?
The accusations are certainly not something to be taken lightly. Hindenburg actively shorts companies that it believes are faulty and puts its money where its mouth is. It has made a name for itself by making damning allegations at big names. The move against Block comes hot on the heels of its market-rattling attack in January on Indian conglomerate Adani Group.
Cash App, the payment service that allows users to easily transfer money using their mobile phone, is at the heart of Hindenburg’s report. Since being launched in 2013, according to Block, Cash App has grown to 51 million users and generates $3 billion in annual gross profit – half of its total. But that growth and performance is now being undermined and thrown into doubt by Hindenburg.
It also throws a spanner in the works when growth is already slowing. Block saw overall revenue and earnings both fall in 2022 for the first time in six years as the explosion in demand we saw the three years prior, partly fuelled by digital payments taking off during the pandemic, started to unwind and its bottom-line succumbed to inflationary pressures.
With the outlook for consumer spending, interest rates and inflation all uncertain, the Hindenburg report has been published at an already challenging time for Block.
This will undoubtedly put the spotlight on Cash App and lead to heightened scrutiny, which could see the pressure being applied to Block shares persist for some time. Fortunately, the report does not take aim at Square, so investors can remain confident in at least half of the business for now.
Where next for SQ stock?
Block shares closed at their lowest level since the start of 2023 yesterday, when the report triggered an 8-fold day-on-day increase in trading volumes, and are down another 2.7% in premarket trade today, poised to open at $60.16. The stock is likely to remain highly volatile as markets digest the news and weigh up whether it has presented a dip to buy or sounded the alarm for short sellers.
The December floor of $59 should provide some support but the door is open to the $53.40 level of support from last October. Anything below here brings the two-and-a-half year low of $51.50 back into view.
On the upside, the job is to try and reclaim the ground lost yesterday but $69 - the top saw in December, the bottom in March and in-line with the 200-day moving average - would be a sensible initial target for any recovery.
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