Icahn’s Latest Disclosures Raise Critical New Questions About Margin Loans, Continued Portfolio Losses $IEP

Block’s Response Confirmed Inflated User Counts While Ignoring Other Key Issues $SQ

The acquisition is flopping. In 2022, the year Afterpay was acquired, the pro forma combined entity lost $357 million, accelerating from pro forma 2021 losses of $184 million. (36/n)

We also think Jack Dorsey has built an empire—and amassed a $5 billion fortune—professing to care deeply about demographics he is taking advantage of. Having sold shares near the top, he's ensured he'll be fine regardless of the outcome for everyone else.

Despite current rich multiples, Block is facing threats from key competitors like Zelle, Venmo/Paypal & smartphone powerhouses like $AAPL & $GOOG. Apple has grown Apple Pay activations from 20% in 2017 to over 70% in 2022 & now leads in digital wallet market share. (41/n)

We think Block has misled investors on key metrics, and embraced predatory offerings and compliance worst-practices in order to fuel growth and profit from facilitation of fraud against consumers and the government. (42/n)

Despite this, $SQ is valued like a profitable growth company at (i) an EV/EBITDA multiple of 60x; (ii) a forward 2023 “adjusted” earnings multiple of 41x; and (iii) a price to tangible book ratio of 13.1x, all wildly out of line with fintech peers. (40/n)

On a fundamental basis, even before factoring in our findings, we see downside of 65% to 75%. Block reported a 1% YoY revenue decline & GAAP loss of $540.7M in '22. Analysts have future expectations of GAAP unprofitability & the co. has warned it may not be profitable. (39/n)

Block’s Afterpay acquisition is flopping. In 2022, the year it was acquired, Afterpay lost $357 million, accelerating from $184 million in 2021. (36/n)

Fitch Ratings reported that delinquencies through March 2022 had more than doubled, to 4.1% from 1.7%, in June of 2021. Provisions for credit losses increased to $203.7m in 2022 from $109.9m in 2021. Total processing volume declined -4.8% from the previous year. (37/n)

$SQ hypes other mundane or predatory sources of revenue as breakthroughs. ~31% of Cash App rev comes from instant deposit which Block says it pioneered & works as if by “magic”. Every major competitor we checked provides a similar service at comparable or better rates. (38/n)

Competitor $PYPL has disclosed it is under investigation by SEC & CFPB over similar use of a small bank to avoid “interchange fee” caps. A FOIA request we filed with the SEC indicates $SQ may be part of a similar investigation. (33/n)

Afterpay was designed in a way that avoided responsible lending rules in its native Australia, extending a form of credit to users that may have no income or credit. Afterpay doesn't technically charge "interest", but late fees can reach APR equivalents as high as 289%. (35/n)

$SQ completed the $29 billion acquisition of ‘buy now pay later’ service Afterpay in 2022. Block has celebrated Afterpay as a major innovator, allowing users to buy things like a t-shirt and pay over time, only incurring massive fees if payments are late. (34/n)

$SQ includes only vague references in its filings acknowledging it even earns “interchange fees”. It has never revealed the economics of this category, yet roughly 1/3 of Cash App’s revenue came from this opaque source, according to a 2022 Credit Suisse report. (32/n)

Congress passed a law that legally caps “interchange fees” charged by large banks that have over $10 billion in assets. Despite having $31 billion in assets, Block avoids these regulations by routing payments through a small bank and gouging merchants with elevated fees. (31/n)

Block reported a pandemic surge in user counts and revenue, ignoring the contribution of widespread fraudulent accounts and payments. The new business provided a sharp one-time increase to Block’s stock, which rose 639% in 18 months during the pandemic. (28/n)

With its influx of pandemic Cash App users, our research shows Block has quietly fueled its profitability by avoiding a key banking regulation meant to protect merchants. “Interchange fees” are fees charged to merchants for accepting use of various payment cards. (30/n)

As $SQ soared on the back of facilitation of fraud, co-founders Dorsey and James McKelvey collectively sold over $1 billion of stock during the pandemic. Other execs, including CFO Amrita Ahuja and lead manager for Cash App Brian Grassadonia, also dumped millions in stock. (29/n)

Block had obvious compliance lapses that enabled fraud, such as permitting single accounts to receive unemployment payments for multiple individuals from various states, and ineffective address verification. (26/n)

In an apparent effort to preserve its growth, Cash App ignored internal employee concerns, along with warnings from the Secret Service, FinCEN & State Regulators which all specifically flagged the issue of multiple payments going to the same account as a sign of fraud. (27/n)

Compared to its Ohio competitor, data shows that Cash App’s partner bank had nearly 10x the number of applicants who applied for benefits through a bank account used by another claimant – a clear red flag of fraud. (25/n)

In Ohio, suspect pandemic-related unemployment payments to Cash App’s partner bank were 8x higher than the largest recipient of claims in the state, even though the competitor processed 2x the claims, according to data we obtained via a public records request. (24/n)

Mass. sought to claw back over 69,000 payments from Cash App accounts just 4 months into the pandemic. Suspect transactions at Cash App’s partner bank exceeded major banks like JP Morgan and Wells Fargo, despite the latter banks having 4x-5x as many deposit accounts. (23/n)

Within weeks of Cash App accounts receiving their first government payments, states sought to claw back suspected fraud, former employees told us. (20/n)