Hindenburg Research is out with another report. This time, it’s aimed at Jack Dorsey’s Block Inc.
What is Block Inc.? When you visit the financial tech company’s website, alongside all the playful widgets — a playlist curated by Jay Z and a tap-to-move function you can test on the fluid block on screen — you can view the products that Block Inc. has to offer:
- TBD is a platform that developers can use to create their products. They are provided with open-source technologies for this purpose.
- Square is a payment software that aims to make commerce and customer services easy for all businesses.
- TIDAL is a music streaming platform, much like Spotify — but with a higher quality listening experience.
- Spiral funds open-source projects that aim to make bitcoins more desirable than they are right now
- Cash App lets you manage payments, stocks and bitcoin
What does the Report say?
The Hindenburg Report has led to Block Inc.’s stocks crashing by 20%. The result of a two-year study, the report smirks upon the innovative thread of the tech company’s growth: “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.”
It finds fault particularly with the Cash App that gained popularity recently. Block Inc. apparently misled people by overstating the number of active users and not declaring the full customer acquisition costs (CAC is all that the company spends on sales and marketing).
A large section of the ‘real’ active users was found to be criminals who maintained more than one dummy account to steer their funds by fraud. The implications of such transactions are troubling: “Cash App was also cited “by far” as the top app used in reported U.S. sex trafficking, according to a leading non-profit organization. Multiple Department of Justice complaints outline how Cash App has been used to facilitate sex trafficking, including sex trafficking of minors.”
During the pandemic, under the pretext of government payments (including unemployment benefits), multiple incidents of COVID fraud were reported or suspected with Cash App being the medium for these. One key loophole led to this: the app allows multiple payments (all for different people) to be received by a single account.
Allowing a shadow monetary network to grow unchecked can indeed be debilitating for the country’s security at stretch. The identity of accounts can also be edited to mimic that of others. Even Jack Dorsey’s fake accounts were created on the platform.
According to testimonials received by Hindenburg Research from former employees, when found to be engaging in fraudulent activities, the user accounts were blacklisted but never banned.
The report also points out how Block Inc. has managed to avoid paying interchange fees to the government. These regulations apply to large banks with assets worth more than $10 billion. But, “Block avoids these regulations by routing payments through a small bank and gouging merchants with elevated fees.” All this while Paypal remains under close observation for similarly evading the payment.
Why has the stock gone low?
Now, what has led to the sudden slump in shares for Block Inc.? The prognosis that the report describes: Block’s year-over-year revenue has dropped by 1%. This is in addition to the GAAP loss calculated at $540.7 million for the past year (GAAP costs are non-adjusted and include those of acquisitions or any other non-regular expenses). The adjusted earnings show a different picture for the current year, but Hindenburg concludes that Block has absolutely nothing to offer in comparison to the range of its competitors — the company itself does not have hopes of profitability.
Combining this already dipping performance with the now-revealed fraud run through user accounts, the credibility of the company (even if it was planning to turn a new leaf over) is now in hazy spirits.
Hindenburg reports are of course not fully conclusive. They give out the disclaimer that you must inform yourself enough before you act on what any of these reports state.
Until a well-developed counter is available, the doubts will loom. Block should ideally choose to clear the air on allegations and install more transparency and verified presence in its products.
And to the reader: read, learn, and think wisely before you invest.
