Block gave a 'robust' response to brutal short-seller report, and shares of the Cash App parent are looking at 40% upside, Bank of America says
- Shares of Block could rise 40% from recent levels, Bank of America said Friday.
- Block gave a "robust" response to Hindenburg Research's report raising fraud concerns at the Cash App parent.
Block stock holds the potential to push 40% higher from recent levels, buoyed in part by the company's "robust" response to a short-seller's claim about fraudulent accounts on its Cash App platform, said Bank of America.
The investment bank, in a note to clients released Friday, maintained its buy rating on the payments services company and said its price objective was $96 a share. That implies a 40% increase from Thursday's close at $68.49.
The stock rose 2% during Friday's session, building on its 3% advance on Thursday. Block on Thursday issued a detailed response to Hindenburg Research's March 24 report on the company led by Jack Dorsey.
The short-seller said its two-year investigation raised concerns about Block's reporting on monthly active accounts on Cash App and related compliance processes.
Block on Thursday said, among other things, that Cash App had about 44 million internally verified monthly users out of its 51 million monthly active users on the platform, which allows people to send and receive money and buy bitcoin and stocks.
"These 44 million accounts are represented by 39 million unique Social Security numbers, as some individuals hold multiple accounts (i.e., personal and business)," BofA equity analyst Jason Kupferberg wrote. "These metrics suggest that the short report's allegation that 40-75% of Cash App accounts are fake/fraudulent/duplicative is not credible."
Hindenburg said Friday that Block's response "confirmed it has reported inflated user counts to investors for years."
BofA said Block's compliance investments since 2019 have grown more than twice as fast as overall gross profit and have "meaningfully increased" as a percentage of overall operating expenses.
Meanwhile, the investment bank also said it's "bullish" on Block's dual-sided business that consists of Cash App and Square, the platform used by small and mid-sized business to accept credit card payments.
"Shares underperformed in '22 due to macro concerns, but we believe the stock is not being given enough credit for the general resilience the business has shown to date as well as its operational expenditure discipline," Kupferberg said.
Block's lack of "legacy tech" overhang seen at some other payment companies should make it easier to own, Kupferberg said without specifying any companies. "We believe that fundamentals and valuation … suggest ample upside from here."
Downside risks to BofA's price objective include intensifying competition, macro conditions for small and medium-sized businesses, and a lack of diversification for Cash App revenue and gross profit streams.