Hindenburg Research's latest short selling report is on Block (NYSE:SQ) and has driven the stock down 15%. For a company around a $40 billion market capitalisation that's a big hit. The allegations are as we might expect if someone expects a payments firm to go wrong.
That is, we don't necessarily think that the allegations made by Hindenburg about Block, or the payments service Square, are correct. Nor would we expect to see these things happening in Square or Block. Rather, if, note if, a payments service such as Square were to go wrong then these are the sorts of things we'd expect to see, as alleged about Block. For payments services are likely to go wrong in these ways if they go wrong at all.
Block stock price from NASDAQ
As we can see the allegations triggered a more than 20% fall some of which has been clawed back to leave SQ 15% down on the day.
The allegations are, as we say, those we'd expect if there were indeed something wrong at a cash payment system. Allowing those who would not gain banking services elsewhere to use the platform is an obvious way of gaining custom. Unfortunately, many of those who cannot gain banking elsewhere will be criminals - thus the allegation that the Square services are oft used by criminals. Inflated user counts are another claim.
The biggest point about all of these claims are that they're a failure of detailed management. Payment systems famously require detailed, near anal retentive, management focussed on the tiniest of details. We face the question of, well, do we believe the claims? If we do then Block is worth less than previously thought and quite possibly less than today. If we don't then this is a storm that shall pass and the Block stock price should recover.
We have before us a guide to this. Not an accurate one, just something illuminating. Elon Musk really got started with a payment system, PayPal. He's just taken over the Jack Dorsey founded company, Twitter. We are seeing a slashing of the workforce, a demand that all focus on the details and stop grandstanding. Leave Musk and his free speech idea aside. We're not, from Twitter, seeing Jack Dorsey revealed as a manager interested in, or perhaps even capable of, that necessary attention to detail. That is, given the independent evidence we have those allegations at Block could be true.
That's a worrying observation for Block's chances of shrugging off the Hindenburg claims.