Analysts at Wedbush Securities have reiterated their ‘Neutral’ rating and $70 price target for Block after the payments app’s stock came under pressure on Thursday amid fraud allegations by short-seller Hindenburg Research.
Shares of Square's parent company Block closed down 14.8% on Thursday and fell another 3% to US60.10 shortly after the opening bell in New York on Friday.
“We believe current valuation also factors the company’s ability to expand earnings before interest, taxes, depreciation and amortization (EBITDA) margins. Accordingly, our $70 price target factors a P/E multiple of 27x our projected CY24E adjusted earnings per share (EPS),” the analysts wrote in a note to clients.
Causing Thursday’s share price crash was a report by Hindenburg alleging that Block had taken advantage of investors by using "inflated metrics."
The analysts noted that Hindenburg’s report quoted former employees suggesting the company engaged in practices intended at inflating certain user metrics.
“We also believe that commentary related to AfterPay’s under-performance as well as SQ’s valuation are well understood/known,” they wrote.
The analysts highlighted two specific allegations in Hindenburg’s reports. First, that Block allegedly consolidated peer-to-peer fraud in sales and market expenses to mask losses and avoid a public relations issue.
Secondly, Hindenburg’s allegation that by failing to disclose interchange fees, it may have avoided caps by routing payments through small banks, circumnavigating the Durbin Amendment exemptions.
“On a fundamental basis, Hindenburg recognized a 65% to 75% downside on share price, and consensus future expectations of unprofitability,” Wedbush’s analysts noted.
“This analysis is based on the deceleration of KPIs (Cash App inflows and MTAs), unprofitability, and an outsized EV/EBITDA compared to peers (PYPL).”
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