SQ -18%: What Happened and How Will SQ Move?
$Block(SQ)$ fell 18% yesterday on short-seller report. Hindenburg Research released a report based on a two-year investigation, accusing Block of inflating user numbers.
Hindenburg claimed that
Block has wildly overstated its genuine user counts and has understated its customer acquisition costs.
However, Block said it was exploring legal action against the short-seller.
Hindenburg's report was "factually incorrect and misleading" and "designed to deceive and confuse investors.
Cash App Was Targeted: Will compliance issues affect the company's financials?
Cash App is the most important driver of Block, which also been heavily criticized by Hindenburg for facilitating criminal activities.
1. Cash App was used to steal billions from unemployment benefits during the pandemic
During the pandemic, Block made it easy for people to accept stimulus checks and unemployment benefits from the Cash App, which helped drive a surge in its use. As of last December, the Cash App had more than 51 million monthly active users, more than double the pre-pandemic level.
Block's popular Cash App may have facilitated scammers to take advantage of government stimulus programs during the pandmeic.
Source: Hindenburg's report
In response to a request for public records, Massachusetts told the short-selling agency that the state seeks to recover more than 69,000 unemployment payments from the banks behind Cash App accounts.
All in all, multiple failures in Cash App's compliance process help scammers steal billions of dollars from government payments.
2. Fake accounts make Cash App facilitate criminal activity
Even if a user is found to be engaged in fraud or other prohibited activity, $Block(SQ)$ only blacklists the account without prohibiting the user from using it.
Former Cash App employees interviewed by Hindenburg estimated that
a large percentage of Cash App accounts were likely to be fake, fraudulent, or linked to a single individual.
The fake accounts issue is closely related to the key points that Block overstated its genuine user counts
Cash App's compliance controls were another target of Hindenburg's attack. The short-seller cited court documents showing that law enforcement agencies said criminals used Cash App to move drug money or pay for sex traffickings.
What will happen to Block's share after Hindenburg's report?
For reference, Hindenburg has targeted about 30 companies since 2020, whose stocks fell an average of about 15% the day after the reports were issued and an average of 26% six months later.
Hindenburg has also previously issued short-selling reports against electric truck maker $Nikola Corporation(NKLA)$ and Indian conglomerate Adani Group. Nikola's founder was later convicted of securities fraud.
Hindenburg's short-selling report focused on Cash App's compliance issues, and it remains to be seen if this issue will affect Block's financials.
Conclusion
From the perspective of individuals, the loose compliance constraints facilitated criminal activities and the company needed to rectify them.
But from an investor's perspective, Hindenburg's short-selling report puts too much emphasis on humanitarianism and might be groundless in terms of financials.
Was Block oversold yesterday?
How do you view this shorting report?
Do you choose to short or bottom Block?
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🌟🌟🌟After the Fear and Contagion of the recent Bank runs, it is not surprising that $Block(SQ)$ has been oversold by nervous investors on news of the Damaging Hinderberg Research.
Whether this report is true or otherwise, remains to be seen as it is too early to tell pending further investigations by the authorities.
Nonetheless Cathie Wood is a big supporter of $Block(SQ)$ and if the report is false then she stands to gain.
This report is a very serious allegation on the integrity of Cash App, the centrepiece of $Block(SQ)$ . It is important that Block management refute the allegation by showing proof that the report is not true.
Until such time, I would stay clear of investing in $Block(SQ)$ as its share price may plummet further. The current environment is not conducive to taking risky bets even if it is to short the stock.
@Tiger_chat
As retail investors, it is hard to ascertain the extent of impact given limited info available. There may be short term dead cat bounce but the future can be rather uncertain, for example government imposng strict regulations and how that might impact the overall Cash App operations and business.
As a risk averse investor, I typically avoid scooping under such circumstances. Might be better to look for other fundamentally strong stocks [Happy]
short reports are just opportunities and create volatility for price discovery.
how's yours @Viv22 @LMSunshine @KYHBKO @Tigress02 @Universe宇宙 @kungpao @wine18 @cindyft @Xian789 @MTok
this hidenburg made huge money by giving report against Adani group in India following this stock fell lot... making huge losses to some investment bank and firms.....
In the other side, in its history, not all Hindenburg's 'accusation' were correct. Somebody needs to scrutinize the 'accusation' and the facts. It is different with Adani's case whereby several parties already gave 'alerts' even before Hindenburg's action.
In short, it will take time to see the 'truth', waiting a scrutinizing process and the $Block(SQ)$ 's defense.
Wow. Interesting that Hindenburg Research has gone after Jack Dorsey's SQ.
Let's see how Block fight back against the short seller since it's claiming its "factually inaccurate and misleading report" that was "designed to deceive and confuse investors".
Come share your views for $Block(SQ)$