Morningstar
Stock Insight

Is Block’s Cash App Built on Fraud?

Short-Seller Hindenburg thinks it is, we find the claims largely anecdotal. There is no change to the company's Economic Moat Rating, or fair value estimate.

Brett Horn 23 March, 2023 | 10:52AM
Facebook Twitter LinkedIn
Font-Size

Block

Short-seller Hindenburg Research released a report detailing its claims that Block (SQ) is materially overvalued. The report makes a number of claims, but in our view the primary claim is that the Cash App business has been built largely through fraud. We have reviewed Hindenburg's claims and find them largely anecdotal. That said, we would reiterate our Very High Morningstar Uncertainty Rating for Block.

One of the key drivers of that uncertainty is the Cash App business. We think the long-term economics of this business are very difficult to predict, and that a significant factor is that the regulatory framework for the P2P space is far from settled. Some of the issues raised by Hindenburg could prompt a regulatory response. We will maintain our fair value estimate of US$104 per share, and maintain our narrow Economic Moat Rating.

Hindenburg’s Claims Appear Almost Entirely Anecdotal

Hindenburg believes the Cash App platform is being used to perpetrate criminal activity, and that the company has turned a blind eye to this fact. Their report raised a number of examples along these lines, but the evidence appears almost entirely anecdotal.

In our view, the fact that rappers reference using Cash App for fraud in their lyrics is not compelling evidence of widespread issues. More potentially troubling are claims that Block is not only aware of widespread fraud on its platform but is complicit in developing internal procedures and weak compliance measures that make it easy to use the platform for fraud.

Further, Hindenburg claims that Block is artificially inflating user metrics. These claims, however, appear to rest almost entirely on claims from former Block employees, who may be biased against the company. Again, we believe that the regulatory regime that will ultimately surround the P2P space is far from completed, and the risk of regulatory rules affecting the long-term economics of the space is meaningful.

To the extent that any of Hindenburg's claims are true or even perceived as potentially true by regulators, this could prompt a regulatory response

TAGS
Facebook Twitter LinkedIn
Font-Size

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Block Inc Class A89.65 USD2.29Rating

About Author

Brett Horn  Brett Horn is an associate director in the equity research department.

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy       Disclosures        Accessibility

The Morningstar Star Rating for Stocks is assigned based on an analyst's estimate of a stocks fair value. It is projection/opinion and not a statement of fact. Morningstar assigns star ratings based on an analyst’s estimate of a stock's fair value. Four components drive the Star Rating: (1) our assessment of the firm’s economic moat, (2) our estimate of the stock’s fair value, (3) our uncertainty around that fair value estimate and (4) the current market price. This process culminates in a single-point star rating that is updated daily. A 5-star represents a belief that the stock is a good value at its current price; a 1-star stock isn't. If our base-case assumptions are true the market price will converge on our fair value estimate over time, generally within three years. Investments in securities are subject to market and other risks. Past performance of a security may or may not be sustained in future and is no indication of future performance. For detail information about the Morningstar Star Rating for Stocks, please visit here

Quantitative Fair Value Estimate represents Morningstar’s estimate of the per share dollar amount that a company’s equity is worth today. The Quantitative Fair Value Estimate is based on a statistical model derived from the Fair Value Estimate Morningstar’s equity analysts assign to companies which includes a financial forecast of the company. The Quantitative Fair Value Estimate is calculated daily. It is a projection/opinion and not a statement of fact. Investments in securities are subject to market and other risks. Past performance of a security may or may not be sustained in future and is no indication of future performance. For detail information about the Quantiative Fair Value Estimate, please visit here

The Morningstar Medalist Rating is the summary expression of Morningstar’s forward-looking analysis of investment strategies as offered via specific vehicles using a rating scale of Gold, Silver, Bronze, Neutral, and Negative. The Medalist Ratings indicate which investments Morningstar believes are likely to outperform a relevant index or peer group average on a risk-adjusted basis over time. Investment products are evaluated on three key pillars (People, Parent, and Process) which, when coupled with a fee assessment, forms the basis for Morningstar’s conviction in those products’ investment merits and determines the Medalist Rating they’re assigned. Pillar ratings take the form of Low, Below Average, Average, Above Average, and High. Pillars may be evaluated via an analyst’s qualitative assessment (either directly to a vehicle the analyst covers or indirectly when the pillar ratings of a covered vehicle are mapped to a related uncovered vehicle) or using algorithmic techniques. Vehicles are sorted by their expected performance into rating groups defined by their Morningstar Category and their active or passive status. When analysts directly cover a vehicle, they assign the three pillar ratings based on their qualitative assessment, subject to the oversight of the Analyst Rating Committee, and monitor and reevaluate them at least every 14 months. When the vehicles are covered either indirectly by analysts or by algorithm, the ratings are assigned monthly. For more detailed information about these ratings, including their methodology, please go to here

The Morningstar Medalist Ratings are not statements of fact, nor are they credit or risk ratings. The Morningstar Medalist Rating (i) should not be used as the sole basis in evaluating an investment product, (ii) involves unknown risks and uncertainties which may cause expectations not to occur or to differ significantly from what was expected, (iii) are not guaranteed to be based on complete or accurate assumptions or models when determined algorithmically, (iv) involve the risk that the return target will not be met due to such things as unforeseen changes in changes in management, technology, economic development, interest rate development, operating and/or material costs, competitive pressure, supervisory law, exchange rate, tax rates, exchange rate changes, and/or changes in political and social conditions, and (v) should not be considered an offer or solicitation to buy or sell the investment product. A change in the fundamental factors underlying the Morningstar Medalist Rating can mean that the rating is subsequently no longer accurate.

For information on the historical Morningstar Medalist Rating for any managed investment Morningstar covers, please contact your local Morningstar office.

For more detailed information about conflicts of interest, including EU MAR disclosures, please see the “Morningstar Medalist Rating Analyst Conflict of Interest & Other Disclosures for EMEA”here

Select Your Site Edition To make sure the site is relevant to you, we need to know if you’re an individual investor or a financial professional.