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Shares of Block Inc. (NYSE: SQ) plunged over 17% on Friday after a report from short-seller Hindenburg Research showed that the company’s ‘magical’ financial technology is not so magical. Block, formerly known as Square Inc., touted the service as a frictionless way to serve ‘unbanked and underbanked’ customers.
However, Hindenburg claimed that a two-year investigation revealed that Block’s lackadaisical approach to compliance and regulation ended up facilitating fraud and criminal activity on the Cash App platform. Also said Block misled investors with inflated metrics.
Hindenburg’s research included interviews with former employees, partners, and industry experts, a detailed review of regulatory and court records, and Freedom of Information Act (FOIA) and public records requests. He said this research shows that Block overstated the original user count and understated the cost of customer acquisition for the Cash App platform.
There is a lot of hype around Cash App and its potential to drive high margin growth and new product launches. However, according to former employees, approximately 40-75% of the accounts they see are fake, fraudulent, or have multiple accounts tied to one person.
The report states that Block’s “Wild West” approach to compliance makes it easy for criminals to commit identity fraud and other fraud on the platform. Users caught committing fraud simply have their accounts blacklisted without being banned. It also said that Cash App is being used to commit more serious crimes.
During the pandemic, the Cash App enabled the payment of massive amounts of COVID relief from the government. The report said that within weeks of the Cash App accounts receiving their first government payments, states began working to crack down on fraudulent payments. Blocking lapses in compliance such as ineffective address verification makes fraud easy.
Hindenburg stated that “while Block shares rose on the back of fraud facilitation, co-founders Jack Dorsey and James McKelvey together sold more than $1 billion in shares during the pandemic. Other executives, including CFO Amrita Ahuja and Cash App lead manager Brian Grassadonia also disposed of millions of shares dollars”.
Hindenburg added that “although Block is valued as a growth company with profits in EV / EBITDA of 60x; a forward 2023 “adjusted” earnings of 41x; and a price to real book ratio of 13.1x, all are not in line with fintech peers”.
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