© Reuters. FILE PHOTO: Jack Dorsey addresses students during a town hall at the Indian Institute of Technology (IIT) in New Delhi, India, November 12, 2018. REUTERS/Anushree Fadnavis
(Reuters) – Shares of Twitter co-founder Jack Dorsey’s Block Inc fell 4% in premarket trading on Friday, a day after the payments firm’s Cash App business became the latest target of U.S. short seller Hindenburg Research.
In a report, Hindenburg has alleged that Block overstated its user numbers and understated its customer acquisition costs.
The company called the report “factually inaccurate and misleading” and said it will work with the U.S. securities regulator to explore legal action against Hindenburg.
Block shares closed 15% lower on Thursday, giving up all the gains made so far this year. They had lost 61% of their value last year amid a broad selloff in the technology sector.
Brokerage RBC Capital Markets said the report will have a negative overhang on the shares for some time, but its view on the stock remained unchanged.
Hindenburg in its report also said that while CEO Dorsey has touted Cash App’s mention in hip-hop songs as an evidence of its mainstream appeal, its review showed the rappers describe it as a means to “scam, traffic drugs or even pay for murder”.
Morningstar analysts said the action of rappers is not a compelling proof of extensive issues but the more troubling allegation is that Block is aware of widespread fraud on its platform.
The report cited a non-profit organization to say that Cash App was also “by far” the top app used in reported U.S. sex trafficking.
Brokerage Jefferies said in a note that most of the issues raised by Hindenburg are known to investors, while pointing out that the short seller has not questioned the accuracy of the company’s financials.
Short sellers typically sell borrowed securities and aim to buy these back at a lower price.
