Can Jack Dorsey’s fintech Block beat the short-sellers?

American fintech giant Block, led by Twitter co-founder Jack Dorsey, arrived on Australia’s sharemarket last year after it purchased Afterpay in the largest takeover deal in the country’s history.

It’s been a rocky ride for local investors in the company formerly known as Square. Its share price has suffered from the wider plunge in technology valuations and, more recently, explosive allegations from short-sellers.

Credit: Stephen Kiprillis

Last month, short-seller Hindenburg Research accused Block, which is dual-listed in the US and Australia, of overstating its customer base and facilitating fraud on its consumer finance app Cash App. The claims were rebuffed by the company, but its stock still plunged about 20 per cent in response to the news, and it has not yet recovered all the lost ground.

Even setting aside the short-seller attack, investors have radically changed their views on fintech stocks, including Block, since the heady days of 2021 when it announced the Afterpay deal.

The main culprit for that change has been the sharp rise in interest rates. The end of ultra-cheap money has prompted investors to prioritise profits from companies today, and pay less for somewhat more risky disruptors hoping to deliver profits in the years ahead.

So, can Block prove the doubters wrong and make significant profits by attempting to disrupt established players in banking and payments?

Industry: Financial services/technology

Main products: Payment terminals; peer-to-peer payment services; buy now, pay later loans.

Key figures: Block chairman and co-founder Jack Dorsey, chief financial officer Amrita Ahuja.

How it started: Square, as the company was known until it changed its name to Block in late 2021, started in 2009 by offering micro businesses a way of accepting credit and debit card payments. The company’s small white payments terminals could be simply connected to a phone, allowing an operator at, say, a market stall to accept credit or debit cards.

Square has since expanded to serve larger firms, and provide software, such as invoicing systems. But what got the market excited during COVID-19 was its peer-to-peer payments app, called the Cash App, which has grown quickly in the US but is yet to launch here. Block’s rationale for buying Afterpay, which provides BNPL loans, is that it can help join the Square and Cash App platforms and create a “super app” for ecommerce.

How it’s going: Block’s share price remains below where it was before the Hindenburg report was published. The ASX-listed shares in the company (known as CHESS depositary interests) are more than 40 per cent lower than when they were first listed. The company is reining in costs as it tries to adjust to investors’ changing expectations, but stresses it is investing for a long-term pay-off, rather than short-term profits.

The bull case: While the short-seller’s allegations have wounded its share price, some observers say the claims against the fintech are largely anecdotal.

Morningstar senior analyst Brett Horn says there is bound to be fraud in every platform, and the fact that rappers have referred to using Cash App for fraud in their lyrics, for example, “is not compelling evidence of widespread issues”. “You’re not going to prove or disprove these allegations one way or the other,” Horn says.

Horn believes Block can get to a scale where it is making sustainable profits, and he believes it is undervalued by the market.

Square, its payment business, is expanding to serve a wider range of businesses, and he believes the company will widen its profit margins as it gains scale. He says there is a view Cash App could service lower-income US customers that banks have traditionally failed to serve, but the long-term economics of this part of the company is “very uncertain”.

“You have to be very risk tolerant to even consider this stock,” Horn says.

The bear case: Critics say that with its market capitalisation of US$38 billion, a lot of good news is being priced into a company that made a loss of US$540.7 million last year.

Hindenburg’s report made a number of claims about Block, but perhaps the most sensational for investors were that it had overstated the number of customers using its Cash App and that the app was used to facilitate criminal payments. Block later provided more information on how it verified customer accounts, and reasons why some people had more than one account. Morgan Stanley analysts said these should “modestly reassure” investors.

The short-sellers say that even before considering the latest claims, Block is valued like a “profitable growth company”, with a price-to-earnings multiple that’s “wildly out of line with fintech peers”.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.