Hindenburg's effect! Block's stock free falls by 22%. What short seller expects? (2024)

At the time of writing, Block's stock was traded at $62.27 down by 14.29%. The stock has hit the day's low of $56.50 --- resulting in an overall nosedive of 22.22% on the exchange.

On the previous day, Block's stock stood at $72.65.

The American company which offers payment and mobile banking services for merchants and consumers --- is listed on New York Stock Exchange.

Hindenburg's report claimed that Block has allowed fraudulent accounts to proliferate on cash applications, generating illegitimate revenue and exaggerating user metrics.

The short seller's report said, "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."

Hindenburg shed great limelight on Block's CASH App platform. As per the short seller, former employees estimated that 40%-75% of accounts on Cash App that they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual.

Hindenburg said that even as billions of fraudulent transactions were being processed through Cash App’s platform, Block insiders were hitting the exit to the tune of more than $1 billion in insider stock sales between March 2020, the beginning of the pandemic, and December 31, 2021.

In regards to Block's stock price, Hindenburg believes it has about 65% to 75% fundamental downside from current levels.

It said, "Despite its revenue slowdown, current unprofitability, its warning of future unprofitability, and signs of stagnation at Cash App, investors have awarded Block valuation multiples that price in an expectation of rapid growth. The company trades at an EV/EBITDA multiple of 60x and a 2023 forward P/E ratio of 40x on “adjusted" earnings, according to FactSet."

Comparing it with peers, Hindenburg said Block competitor Paypal trades at an EV/EBITDA multiple of 16.6x, and 15.1x adjusted 2023 earnings, suggesting 62%-72% downside for Block were it to trade in line with its peer.

Also, Hindenburg's note said, on a tangible book basis, many fintech competitors such as Affirm, Robinhood, SoFi and Upstart trade between 1.6x to 2.1x, whereas Block trades at ~13x tangible book. Even Paypal, which has grown revenue and generated a GAAP profit every year since re-emerging as a public company, trades at a 25% discount to Block on this basis. A re-rating closer to the peer average would represent 77.5% downside for Block.

To make up for these fundamental realities, Block has extensively relied on non-GAAP adjustments to report growth despite weakening metrics, the short seller said.

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Published: 23 Mar 2023, 10:50 PM IST