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Short sellers are essentially litmus tests. If you're all legit, they'll get wrecked, if you're doing dumb things, you're about to get found out.
The first few times Hidenburg published a report, this would have been true. But now they can publish something and stock will crash just because of the fact they published something. Market is largely sentiment driven in the short term and retail is not going to go do in depth research. And this short term decline is enough for short seller to crash.
Take this report for example. A lot of their claims are not very substantial. Like the lyrics of a hip hop song are not the evidence they think it is. I didn't see a lot of evidence of the fact that 70% accounts are fraudulent either.
Of course, I could be wrong, and Hindenburg may have bitten off more than they can chew. But my intuition says the accusations are at least defensible.
So if they open at 6.54$ and 1.25$ respectively the short seller (hindenberg) potential gains from sq block short via short term puts are
6.54-2.54 = 4x100 = 400$ per contract 1.25-.25 = 1*100 =100$ per contract
If they had bought 1000 contracts of each that is 400k and 100k respectively for the 72$ and 60$ sq put!!
The 60 puts are 3.25$ hence gain is 300$ per contract
Assuming hindenburg bought a 1000 of each 1100000 on the 72 puts and 300000 on the 60 puts as Sq block is now trading at 58$ much to jacks chagrin
That's a cool 1.4 mn $
Is this legal if so why isn't everyone doing it?!
There are in fact millions of people who use Cash App, though it's probably less popular overall than Venmo. I know this because my wife and her friends will mention it and Venmo when talking about splitting bills. (Given the technical challenges Wells Fargo has had lately, I'm not sure who trusts Zelle.)
A lot of the claims amount to criticisms of Block's address verification functionality. But that doesn't mean Block engaged in fraud, perhaps they just have crappy address verification tech. Short of sending a human investigator out to physically verify that a given person really is located at a given address, I'm not sure what foolproof methods people use to eliminate that kind of fraud. The "let's send you a postcard with a code" method I've seen from legacy banks seems quite easy to exploit as well, just a bit slower.
The last question about merchant fees isn't fraud at all, but regulatory avoidance. Maybe the government will shut this down, or maybe they've found a loophole that Congress may want to close. It's unclear.
The least persuasive part of the report was the implication that rap lyrics imply Cash App facilitates crime.
I've gone through it fully, not just the tl;dr. It's not overblown. They're not saying Block is doing anything illegal, only Block is valued much too highly.
The bulk of it is Block skirting regulatory requirements to acquire more users easily, and those users doing illegal things with their Cash app accounts. And this is already crashing down as they're now, for example, required to collect full social security numbers for the Cash app debit cards (previously only last 4 digits).
Considering the Cash app is Block's largest consumer user base, and a large reason for Block's high valuation they have a good case for why Block should be valued closer to PayPal than as a disruptive growth stage company.
Now what is a reasonable price earning ratio for such a business?
Hindenberg is accusing Block of committing fraud. That's an allegation of criminal activity.
Block may be overvalued. I probably wouldn't buy it, and have my own beef with how Block operates.
I don't think so unless I missed a big accusation?
They're accusing Block of enabling fraud, and when Block can no longer enable fraud -- say due to higher regulatory oversight -- it'll lose much of its appeal and customer base, which has already dropped significantly post pandemic.
I trust Zelle (i.e. the bank itself) more than I trust a third party to ACH money into and out of my account.
This is what Block do: https://www.youtube.com/watch?v=J2uhWTFvug8
Yes. Also, they’d have to re-state their past user numbers and pay fines, both of which would reduce their valuation.