Atlantic Equities is turning more cautious on shares of Block as it awaits more clarity on its Cash App product in the wake of Hindenburg Research’s short position. “With valuation remaining high, we believe it is prudent to turn neutral until we can get more comfort around sizing the exposure to these risk factors,” wrote analyst Kunaal Malde as he downgraded shares from overweight. Shares slumped 5% before the bell, building on a near 15% dive Thursday after Hindenburg Research revealed a short on Block, saying that its Cash App platform enables criminal activity, lacks strong compliance controls and uses predatory fees. Hindenburg also said Block inflates Cash App user metrics. SQ 1D mountain Block shares tumble Block responded to Hindenburg, saying that it plans to work with the Securities and Exchange Commission to explore legal action against the short seller. Malde called the response “weak” and lacking the specific rebuttals he hoped for. Looking ahead, Malde views illegal activity as the greatest risk for Cash App. About 20% of Block’s gross profit stems from instant deposit fees, with a chunk likely coming from illegal activity, the analyst noted. A crackdown on risk controls could lead to a 10%-30% reduction in fees, and eat away at 10% to 30% of adjusted EBITDA, he estimates. “We recognise the pushback that most of these concerns are not new and difficult to prove, but the report could result in more forced sellers near-term due to reputational risk,” Malde said. “If the stock had strong valuation support, we would have been more inclined to stick with our Overweight recommendation.” The stock’s down 1.5% this year after falling 61% in 2022. The firm’s $70 price target implies about 13% upside from Thursday’s close. — CNBC’s Michael Bloom contributed reporting
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