To The Moon

Activist short seller Hindenburg Research has just stricken again, this time it is against payments platform $Block(SQ)$ . According to information from Unusual Whales, on 21 March 2023 a trader entered $74 put options that would expire on 14 April 2023 and exited half the positions after the report was published, turning $500K investment into $5M in less than a week!

Among the more serious allegations that Hindenburg Research claimed are overstatement of user accounts, regulatory non-compliances and interchange fees. Are they valid allegations?

1) Unlike Hindenburg, Block does not refer to users, but rather transacting actives, i.e. if one have 2 accounts that he uses, then he will be counted as 2 transacting actives by Block, which defines a transacting active as an account that has made at least one financial transaction within the specified period. As long as Block has not misled in its definition and misrepresented the numbers, I think the allegation is misplaced. In this information age, it is not uncommon for a user to own multiple accounts on the same platform for different purposes or simply because he has forgotten the password for an account created earlier. In fact, top line and bottom line are more important performance metrics to me than the exact number of users.

2) Hindenburg also went at length to associate Block with fraudulent activities, having mentioned the word "fraud" 122 times in its entire report. Hindenburg claimed that one can easily create fake accounts and freely use them for criminal activities. In fact, one can call himself Superman or Wonder Woman. However, that has already been reported for years. One can have an alias, but he will have to provide his real identity to order a Cash App Card from Block and authenticate it before it can be activated for transactions. Of course, Square could have been stricter in its controls, but I doubt that would have been construed as fraudulent. As long as money is involved, I think it is unfair to single out Block but ignore the facts that scams are equally prevalent on other payments platforms.

3) Merchants pay interchange fees to Block to cover the cost of accepting, processing, and authorizing card transactions. Its rival $PayPal(PYPL)$  has a similar interchange fee structure and recently disclosed that the practice is being investigated by the Securities and Exchange Commission. While Block may face similar investigation in future, PayPal has not been convicted of any wrongdoing. Even if Block is compelled to eventually impose a cap to its interchange fees, the impact to its profitability has yet to be determined. In the meantime, it will be worth paying attention to the outcome of PayPal's case.

The jury is still out whether Hindenburg's report carries real merits. Meanwhile, Block has countered that the report is factually inaccurate and designed to deceive and confuse investors, promising regulatory actions against Hindenburg.

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