On March 23, 2023, famed short-seller Hindenburg published a report about Block (SQ). It claimed that Block overstated its user counts and understated customer acquisition costs.
Block will struggle financially in this downturn. It acquired Afterpay Ltd. For $13.9 billion in stock. It is among many tech firms that acquired aggressively when stock markets were bullish.
The Hindenburg report could pressure Block to increase its security levels. It could raise alarm bells for regulators, who will review Block’s business. If Block does not do enough to protect businesses from fraud, it will need to invest more in anti-fraud measures.
An increase in regulatory costs will validate Hindenburg’s short call against Block.
Speculators who bought SQ stock are betting that Hindenburg is capitalizing on its popularity. The firm benefits from the short report because it bets against the stock. Block could prove Hindenburg’s allegations are false. However, it may not respond at all either. That would send SQ stock even lower.
Your Takeaway
When Block reports results next quarter, look closely at the profit margins. Look out for the cost to acquire users rising as competition in fintech increases.
Block may also post strong revenue and profits despite the worsening economy. That would restore shareholder confidence in SQ stock.
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