Short-seller Hindenburg Research released a report detailing its claims that Block (SQ) is materially overvalued. The report makes a number of claims, but in our view the primary claim is that the Cash App business has been built largely through fraud.

We have reviewed Hindenburg's claims and find them largely anecdotal. That said, we would reiterate our Very High Morningstar Uncertainty Rating for Block.

One of the key drivers of that uncertainty is the Cash App business. We think the long-term economics of this business are very difficult to predict, and that a significant factor is that the regulatory framework for the P2P space is far from settled. Some of the issues raised by Hindenburg could prompt a regulatory response.

We will maintain our fair value estimate of US$104 per share, and maintain our narrow Economic Moat Rating.

Hindenburg’s Claims Appear Almost Entirely Anecdotal

Hindenburg believes the Cash App platform is being used to perpetrate criminal activity, and that the company has turned a blind eye to this fact. Their report raised a number of examples along these lines, but the evidence appears almost entirely anecdotal.

In our view, the fact that rappers reference using Cash App for fraud in their lyrics is not compelling evidence of widespread issues. More potentially troubling are claims that Block is not only aware of widespread fraud on its platform but is complicit in developing internal procedures and weak compliance measures that make it easy to use the platform for fraud.

Further, Hindenburg claims that Block is artificially inflating user metrics. These claims, however, appear to rest almost entirely on claims from former Block employees, who may be biased against the company. Again, we believe that the regulatory regime that will ultimately surround the P2P space is far from completed, and the risk of regulatory rules affecting the long-term economics of the space is meaningful.

To the extent that any of Hindenburg's claims are true or even perceived as potentially true by regulators, this could prompt a regulatory response