Shares in Square-parent Block plunged Thursday after Hindenburg Research disclosed a short position in SQ stock while claiming that the company inflates Cash App user metrics and facilitates fraud.
Square stock fell 14.8% to close at 61.88 on the stock market today. The loss wiped most of the 2023 gains of SQ stock. Block stock had gained 17% in 2023 prior to the disclosure by Hindenburg.
The digital payment firm said in a written statement: "We intend to work with the SEC and explore legal action against Hindenburg Research for the factually inaccurate and misleading report they shared about our Cash App business today."
"Hindenburg is known for these types of attacks, which are designed solely to allow short sellers to profit from a declined stock price." Square went on to say. "We have reviewed the full report in the context of our own data and believe it's designed to deceive and confuse investors,"
Square's Two-Sided Ecosystem
In its core businesses, Square stock aims to build a two-sided digital payments ecosystem. Products would be designed for both merchant sellers and consumer buyers. The Square Cash App helps individuals manage money, buy stocks and cryptocurrency, and more.
In a news release, Hindenburg says the company has "systematically taken advantage of the demographics it claims to be helping."
The release went on to say: "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."
But Hindenburg Research added 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."
Meanwhile, Jefferies analyst Trevor Williams was skeptical of Hindenburg's allegations.
"While we are not dismissive of the claims on the user metrics, we find little else within the report truly incremental, as topics such as Instant Deposit's gross profit contribution and Cash Card's earning of unregulated interchange are well-known," Williams said in a note to clients.
"What is truly incremental from the Hindenburg report? Allegation that SQ's user-reported user metrics are inflated."
The Other Side Of Investing: See When To Sell Stocks
SQ Stock Relative Strength
Square focuses on software products used across many industries, such as invoicing, payroll and marketing. It also aims to integrate its payment tools into e-commerce platforms.
Meanwhile, Square's Relative Strength Rating stands at 81 out of a best-possible 99, according to IBD Stock Checkup. The best stocks tend to have an 80 or better RS Rating.
SQ stock, meanwhile, has an Accumulation/Distribution Rating of D+. The rating runs from a best-possible A+ to a worst-possible E. The rating analyzes price and volume changes in a stock over the past 13 weeks of trading.
As of March 23, SQ stock has no valid entry point. Square stock needs to form a new base to be actionable.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
