Fraud app?

HINDENBURG SHORT REPORT CLAIMS

Need To Know

• Stock drops ~15% after Hindenburg Research fires a short report, accusing Cash App of engaging in fraudulent activity
• Claims of significant overstatement of monthly active users, with former employees claiming 40-75% of accounts are fake
• Investigation has been ongoing over the last 2 years, much of the evidence is dated

Hindenburg Research, which recently gained public attention from its short attacks on the Adani business empire, released a report on its website, accusing Block of misleading investors regarding its Cash App active users, claiming up to 40-75% of accounts were fake or duplicates. Block has fired back, intending to work with the SEC to explore legal action against Hindenburg “for the factually inaccurate and misleading report they shared about our Cash App business”.

The report focuses on Cash App, which is ~50% of the overall group. With the stock down ~15%, this implies a ~30% fall in Cash Apps value on the back of the report, which we believe is more to do with Hindenburg’s reputation, rather than subject matter. Block has yet to fully respond to each of the claims, however we note several issues with the evidence already surrounding two of the key issues. 

Fraudulent users? Block’s mantra is to serve the ‘underbanked’ segments of the population, providing services to those without credit scores or traditional bank accounts. Hindenburg posits therefore, that many criminals are using Cash App to engage in illegal activity. Whilst we agree that it is possible that some Cash App users are engaging in illegal activities (just like using cash itself), any company that facilities payments of some kind (including Uber, Airbnb etc) can be used for money laundering activities. Block is a regulated entity with AML procedures in place, and regularly monitors transactions for fraudulent activity, closing and reporting accounts where appropriate.

‘Frictionless banking’ is commonly used by Block as a selling point of Cash App, where it boasts an easy user experience to create and use an account. Hindenburg claim it is ‘too easy’ to create an account, only requiring a phone number or email and a zip code. This however is only true if you link an existing bank account, which has already gone through the full KYC (Know Your Customer) onboarding process. The report fails to highlight this fact that there are more steps to the process in setting up an account.  

Overstating unique active users? The report indicates that users can set up multiple accounts, and that the current ~51m active monthly users may be overstated by up to 40-75%. This can easily be debunked by looking at independent App Usage tracking data, where it is the ~6th most used Android app and the ~9th most used iOS app in the US. This is in line with other apps such as Facebook and Instagram. 

We question that if the user statistics that Block report are supposedly materially overstating the actual underlying real users, how do independent sources such as the Apple iOS store show such strong user data?

Long dated investigation. The report claims to have been investigating Block over the last 2 years. A lot can happen over that time frame, including material improvements in compliance and procedures. The report presents information that is largely already known and addressed by the company. For example, it addresses that Cash App only used to require the final 4 digits of the social security number. This has already changed to now require the entire social security number. This change however did not stop it being included in the report, which is a consistent tactic employed by short reports. We also see further inconsistencies in the report surrounding the arguments on Covid related payments and interchange fees.

Investment View

A short report is always unwelcome attention for a company, and the recent success of Hindenburg’s attacks on Adani means this report should not be readily dismissed. We believe that many of the arguments made can be debunked, however the onus is now on Block to act quickly and comprehensively refute the claims made. The key issue will be on whether Block states their reported ‘active users’ metric are actually ‘unique users’ which would all but clear the main concern surrounding user growth. Considering no new fundamental changes for the operating company, we retain our Buy recommendation.