Hindenburg Research's Short Report Causes Block (SQ) Stock to Plummet Nearly 15%

Bullion Bite
Hindenburg Research's Short Report Causes Block (SQ) Stock to Plummet Nearly 15%

Block (SQ), a payments company formerly known as Square, has suffered a significant drop in its stock price following a short report from Hindenburg Research, a well-known short-seller. The stock lost 14.8% on Thursday, and on Friday, it dropped a further 5% in pre-market trading. Hindenburg alleges that Block overstates the number of its real, law-abiding users and that between 40% and 75% of its 51 million monthly transacting users are "fake, involved in fraud, or were additional accounts tied to a single individual." Hindenburg also alleges that Block's CashApp circumvents banking regulations, particularly anti-money laundering rules, making it particularly useful in wire fraud and sex trafficking operations.

The short report accuses Block of cheating on rules regarding interchange fees charged to merchants for accepting various debit or credit cards. It claims that these fees are capped for large banks, but Block routes these payments through a smaller banking partner to circumvent the cap. The report highlights that competitor PayPal is already facing a government investigation for a similar strategy. Hindenburg also alleges that Block's acquisition of AfterPay has been a bust, that insiders, including CEO Jack Dorsey, have sold billions in stock, and that SQ stock is overpriced.

Despite the significant drop in its stock price, Block remains optimistic about its future. The company has released a statement saying that it will work with the Securities & Exchange Commission to "explore legal action" against Hindenburg Research. However, option market observers believe that the short seller has already profited around 10 times on a block of $74 puts purchased before the report's release.

The Block stock forecast remains uncertain, with the stock currently trading near the $59 shelf from December. If the stock breaks through the $59 support level, it could lead to a descent to the demand zone from last autumn, which ranges from $51.50 to $52.50. As the Relative Strength Index (RSI) is yet to reach oversold conditions, discount buyers are likely to wait a few sessions to see where the price action is headed. A close above $62.50 could attract more buyers to the stock.

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