Thursday is turning out to be a bad day for Block (NYSE:SQ) stock. Shares of the digital payments specialist are down 14%, as of this writing, after a short seller launched an attack on the company.
Specifically, following a two-year investigation, Hindenburg Research alleged Block was facilitating fraudsters. The short seller also announced it had opened a short position on the shares.
Hindenburg claimed that after looking into the matter, it discovered that Block’s enormously successful Cash App was probably aiding scammers in exploiting government stimulus plans during the pandemic. The state of Massachusetts informed the short seller in response to a public records request that it sought to recoup over 69,000 unemployment payments from the bank behind Cash App accounts, a total sum greater than that at much larger banks like JPMorgan and Wells Fargo.
Block’s Cash App has flourished by catering to the “unbanked” but Hindenburg has concluded that Block has “systematically taken advantage of the demographics it claims to be helping.”
Scammers aside, Hindenburg alleges there are systemic issues with Cash App, claiming its compliance protocols left a lot to be desired. Additionally, several former employees spoke about how user complaints and internal issues were disregarded.
Mizuho analyst Dan Dolev agrees the report does make some good points, but he does think some arguments aren’t quite as strong.
“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,” the analyst explained. “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,” Dolev went on to add, “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.”
All told, there’s no change to Dolev’s Buy rating or to his $93 price target on SQ shares. (To watch Dolev’s track record, click here)
Most on the Street remains in SQ’s corner, too. The stock receives a Strong Buy consensus rating based on 20 Buys vs. 4 Holds. Over the coming months, shares are expected to appreciate by 57%, considering the average target currently stands at $99.86. (See Block stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.