Block share price crashes 15% after scathing short seller attack

The Block Inc (ASX: SQ2) share price is on course to end the week on a very disappointing note.

In morning trade, the payments company’s shares are down 15.5% to $91.99.

Why is the Block share price crashing?

Investors have been selling down the Block share price on Friday after the company was the subject of a short seller attack from Hindenburg Research.

Hindenburg Research was the short seller behind the recent Adani Group attack.

It has now turned its attention to Block, alleging that its key Cash App business has inflated user metrics, facilitates fraud, and lacks strong compliance controls.

What is being said?

After a two-year investigation, the research firm claims to have found that Block systematically took advantage of demographics it was said to be helping. It summarises:

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.

Inflated user metrics

In respect to its user metrics, Hindenburg Research believes the company is “wildly” overstating its numbers. It commented:

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.

Its analysts suggest that this has been driven by its focus on the underbanked. It adds:

Core to the issue is that Block has embraced one traditionally very “underbanked” segment of the population: criminals. The company’s “Wild West” approach to compliance made it easy for bad actors to mass-create accounts for identity fraud and other scams, then extract stolen funds quickly.

Hindenburg did some tests to see how easy it was to create fake accounts. Unfortunately, it was far easier than you would hope. It commented:

To test this, we turned our accounts into “Donald Trump” and “Elon Musk” and were easily able to send and receive money. We ordered a Cash Card under our obviously fake Donald Trump account, checking to see if Cash App’s compliance would take issue—the card promptly arrived in the mail.

What now?

As things stand, Block has not responded to the 50-page short seller report.

Until it does respond and disprove these allegations, it seems quite likely that the Block share price will remain under pressure. Let’s hope a response comes soon!

The post Block share price crashes 15% after scathing short seller attack appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Block. The Motley Fool Australia has positions in and has recommended Block. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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