Block Investors Are Pulling Back, But These Analysts Are Unfazed By Short Report From 'Novice Industry Outsider'

Hindenburg Research issued a short report that sent shares of Block Inc SQ down on Thursday. Analysts are sharing their reactions and takes on the allegations from the short seller.

The Block Analysts: Bernstein analyst Harshita Rawat has an Outperform rating and a price target of $90.

Morgan Stanley analyst James Faucette has an Equal Weight rating and a price target of $72.

KBW analyst Steven Kwok has an Outperform rating and a price target of $90.

Oppenheimer analyst Dominick Gabriele has a Perform rating and no price target.

KeyBanc analyst Josh Beck has an Overweight rating and a price target of $100.

Related Link: Jack Dorsey's Wealth Erodes By $526M After Hindenburg Report

The Analyst Reactions: Hindenburg makes claims in the short report that Block overstated user counts, illicit activity was prolific on Cash App, and there were compliance issues.

“The most serious allegations, in our view, were around Block’s intentionally lax compliance policies around illicit activities & fraud on its platform and the estimates that 40% to 75% of accounts could be fake, duplicate or fraudulent,” Rawat said.

The analyst said the allegations are hard to prove or disprove and more work is needed to dive into the claims.

“The key issue we will assess is whether Block’s policies are/were significantly different vs. peers.”

The analyst said that they are less concerned about fake and duplicate users, something not uncommon in the sector, noting PayPal Holdings PYPL as an example.

The two big questions for Faucette are “how widespread is the alleged fraudulent issue with Cash App and does the current general banking environment lead to a faster regulatory review/interruption of business that would likely have eventually happened anyway.”

The analyst said one big question could also be how big the impact to revenue is if any issues with Cash App need to be resolved.

“We’ve previously discussed how Cash App seems to have lower verification requirements that potentially may not meet all standards of Know Your Client and Anti-Money Laundering rules,” Faucette said.

The analyst said investors in Block should be prepared for lower growth and monetization for Cash App.

Kwok said the biggest issue from the short report is if Cash App user metrics are overstated and if Block is “enabling” criminal and fraudulent activity.

“While some of the things in the report seem to be taken out of proportion, the key question is whether the company is making revenues/profits on fraudulent accounts and how robust its compliance practices are,” Kwok said.

Gabriele said the claims that Block is a fraudulent business are likely “incredibly low,” but it is hard to prove or disprove the allegations.

“Putting fraud aside, parts of the Hindenburg report actually echo our downgrade note – in particular, growth longevity in Cash App and EBITDA valuation vs. peers,” Gabriele said.

The analyst downgraded shares to Perform in January and remains on the sidelines for the stock.

Beck said the user metrics used by Block and Cash App are consistent with peers and third-party data sources.

“We see no merit to the disparaging claims and rather view the report as observations from a relatively novice industry outsider who is not familiar with standard operating practices and principles within the FinTech industry or the broader regulatory construct,” Beck said.

Block Inc issued its own response to the allegations from Hindenburg on Thursday.

SQ Price Action: Block shares are down 3% to $59.85 on Friday.

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