Morgan Stanley analyst James Faucette told investors on Thursday that while mitigating fraud risk is a key differentiator and competency for Square (SQ), the eventually needed work to address anti-money laundering, or AML, and "Know Your Customer," or KYC, issues could slow its Cash App growth. The analyst's comments follow reports that the Secret Service has begun investigating more than 700 cases of suspected fraud related to the Paycheck Protection Program and Unemployment Insurance Relief program that include P2P money transfer services such as Square's Cash App and PayPal's (PYPL) Venmo playing "an important role in the associated laundering."
FRAUDULENT PPP SCHEMES: Criminals are laundering illegally obtained funds meant for COVID-19 relief through the most popular apps for legally sending and receiving money, CNBC's Scott Zamost, Kayla Tausche and Karina Hernandez reported, citing law enforcement officials. Square's Cash App, Venmo, Zelle and PayPal have become portals to easily move money, making transactions more difficult to trace, the authors noted. “I’ve never seen, in my 28 years’ experience, the amount of fraud that I’ve seen currently,” Roy Dotson, an assistant to the special agent in charge of the Secret Service, told CNBC. “And I think that’s just based sheerly on the amount of money the CARES Act allocated into COVID-related fraud and stimulus.”
CASH APP GROWTH MIGHT BE IMPACTED: Following news reports that the Secret Service has begun investigating suspected fraud related to PPP and Unemployment Insurance Relief programs that include P2P money transfer services playing "an important role in the associated laundering," Morgan Stanley analyst James Faucette said he believes Cash App's convenience "may make it the preferred platform for bad actors." While mitigating fraud risk is a key differentiator and competency for Square, the eventually needed work to address anti-money laundering and "Know Your Customer" issues could slow its Cash App growth, Faucette contended. The analyst cautioned "investors should be prepared for that downshift." He has an Equal Weight rating and $44 price target on Square shares.
WHAT’S NOTABLE: Nasdaq (NDAQ) this morning announced a definitive agreement to acquire Verafin for $2.75B in cash, subject to customary adjustments. "The agreement will combine Verafin's comprehensive suite of anti-financial crime management products with Nasdaq's reach and established regulatory technology leadership to create a global SaaS leader in the fight against financial crime, a worldwide problem that demands innovative action," the companies said.
Nasdaq intends to finance the transaction with a combination of $2.5B of debt and cash on hand and expects debt/non-GAAP EBITDA leverage to be approximately 3.9-times pro forma for the transaction. Nasdaq intends to pursue its existing capital deployment plan, including dividend payments and share repurchases, consistent with past practice, and expects to de-lever over time to return to a leverage ratio consistent with its current investment grade ratings. The transaction is subject to regulatory approvals and other customary closing conditions. Spectrum Equity and Information Venture Partners, both significant investors in Verafin, have agreed to sell their stake as part of this transaction, which is expected to close in the first quarter of 2021.
PRICE ACTION: In Thursday afternoon trading, shares of Square have gained over 4% to $193.26, while PayPal's stock is fractionally up at $191.08.
