Block Stock News: SQ loses another 5% in Friday premarket following Hindenburg short report

Block (SQ), the payments company formerly known as Square, is losing more ground in Friday's premarket in response to a short report from infamous short-seller Hindenburg Research. Block stock lost 14.8% on Thursday following the report's release, and SQ shares are now down another 5% around $59.50 in the premarket. Hindenburg, which recently took down Adani Group for what it called "the largest fraud in corporate history", alleges that Block overstates the number of its real, law-abiding users.

Block stock news: 51 million monthly transacting users questioned

Block boasts 51 million monthly transacting users, but Hindenburg says that ex-employees of the company estimate that between 40% and 75% of that figure is made up of users who are "fake, involved in fraud, or were additional accounts tied to a single individual".

Hindenburg alleges that Block's CashApp circumvents banking regulations, especially anti-money laundering rules, that make it particularly useful in wire fraud and sex trafficking operations. As color for its findings, Hindenburg concocted an entertaining video on YouTube tying together a number of hip-hop music videos in which rappers talk about using CashApp for fraud, drug sales and murder. Hindenburg found billions of dollars worth of identity fraud tied to covid stimulus checks and unemployment payments. Block is opening itself up to criminal and compliance risk, according to this line of thinking.

Additionally, Hindenburg also alleges that Block cheats on rules regarding interchange fees charged to merchants for accepting various debit or credit cards. These fees are capped for large banks, but Block routes these payments through a smaller banking partner to circumvent the cap, according to the report. The report then notes that competitor PayPal (PYPL) is already facing a government investigation for a similar strategy.

From here the short report plays all the hits: (1) Block's AfterPay acquisition has been a bust; (2) insiders like CEO Jack Dorsey have sold billions in stock (3);  SQ stock is overpriced. Though the short report has clearly led to a decline in the share price, there remain plenty of detractors in Block's camp.

Hindenburg is of course benefiting from the crash in Block stock with option market observers believing the short shop has already profited about 10x on a block of $74 puts purchased prior to the report's release. "On a purely fundamental basis, even before factoring in the findings of our investigation, we see downside of between 65% to 75% in Block shares," wrote Hindenburg. That would place SQ stock on a course toward being valued between $19 and $27

For its part, Block released a statement saying it would be working with the Securities & Exchange Commission to "explore legal action" against the short-seller.

Block stock forecast

Block stock crashed through the $71.90 support level on Thursday and is now floating above last December's support shelf at $59 despite trading as low as $56.50 on Thursday. This minimal rebound shows the former Square stock may have reached a solid equilibrium. 

However, another break through $59 should lead SQ on a descent to the demand zone from last autumn that ranges from $51.50 to $52.50. As the Relative Strength Index (RSI) is yet to reach oversold conditions, discount buyers will likely wait a few sessions to watch where price action is headed. A close above $62.50 should usher in more buyers.

SQ daily chart