Treasure Chest | Mar 27 2023
This story features BLOCK INC. For more info SHARE ANALYSIS: SQ2
FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Analysts at UBS contemplate whether Block shares now represent a buying opportunity following unsubstantiated claims from a short seller.
By Mark Woodruff
Whose Idea Is It?
The analysts at UBS
This morning UBS released research suggesting a buying opportunity for Block ((SQ2)) shares given most allegations in a report by short seller Hindenburg Research are unsubstantiated, the broker suggests.
The report claims user metrics on Block’s Cash App platform are inflated by fake and duplicate accounts and there is also widespread fraudulent and criminal activity on the platform.
Block intends to explore legal action against the "factually inaccurate and misleading" report and stands by the company’s products, reporting, and compliance programs.
UBS highlights many of the main points from the Hindenburg report appear to be based on anecdotal evidence and quotes from interviews with "former employees" without stating the number of employees spoken to, their names or their affiliations.
Regarding claims around the number of users on the Cash App platform, the broker points out this metric is one of many provided by Block, allowing investors to assess the performance of the business.
Indeed, every quarter the company walks both investors and broker analysts through a number of performance metrics tied to its operations and UBS feels Block is becoming increasingly more transparent as a company.
The Hindenburg report also notes Block generates a significant share of Cash App revenue from “predatory fees” by partnering with small issuing banks with less than $10bn in assets that are exempt from interchange caps imposed by the Durbin Amendment.
An original goal set forth by the Durbin Amendment to the Credit Card Competition Act in the US was to even the playing field between large and small banks, and the Buy-rated UBS feels any change now to this measure would be counterproductive. The analyst’s US$102 target price is unchanged.
Morgan Stanley agrees with UBS the issue is old news and well appreciated among investors, with most agreeing such fees are likely unsustainable in the very long-term. It’s felt policy makers have been more focused in the shorter-term on the benefit that fintech apps can have on pulling young and “underbanked” consumers into the financial system.
Citi, which has an unchanged Buy rating and US$90 target notes that unless legislation is amended, Block’s bank partnership/sponsor structure legally allows for the partnering with small issuing banks, given Block is viewed as a deposit aggregator and not a consumer bank itself.
More concerning for Citi was the lack of detailed response/refutation by Block in response to the report, which is unlikely to settle investors’ concerns.
Unresolved questions for this broker include whether users of black-listed accounts are permitted to re-enter the platform and more detail as to whether the “active user/accounts” metric is accurate
For Morgan Stanley, the report raises the question of the extent of fraudulent accounts (if true) and the revenue impact of resolving the issue.
While its Equal-weight rating and US$72 target are unchanged, this broker cautions investors to prepare for a potential downshift in Cash App user growth and monetisation as a result of some culling of fake or fraudulent accounts.
Ord Minnett agrees with UBS on the anecdotal nature of the Hindenburg report though concedes it may elicit a regulatory response. The broker maintains its Accumulate rating, but also reiterates its very high uncertainty rating which is largely based on uncertainty around the Cash App business..
The $149 average target price for Block in the FNArena database is based on the Australian dollar targets set by Ord Minnett and Macquarie of $153 and $145, respectively. This target suggests 64% upside to the current share price.
When taking into account the US dollar targets of UBS, Morgan Stanley and Citi, the average is US$88, which at the prevailing exchange rate equates to a target of around $132.50, representing 47% upside to the latest share price.
There are five broker ratings in the database, with four Buys (or equivalent) and one Hold rating.
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