Shares of the payments company formerly known as Square fell more than 20% in early trading Thursday after a short seller questioned the company’s user numbers and accused it of predatory tactics.

Hindenburg Research said a two-year investigation into Block Inc. found the company “obfuscates” its Cash App service’s true user numbers by reporting misleading metrics “filled with fake and duplicate accounts.” It also accused the company of taking advantage of the demographics it claims to serve—lower-income people and minorities—with “predatory loans and fees.”

Representatives for Block didn’t immediately respond to a request for comment. 

Block is best known for its signature white credit-card readers that let businesses accept payments with a smartphone or tablet, though its Cash App peer-to-peer payment service has been a key driver of the company’s growth in recent years. 

Nathan Anderson’s Hindenburg has previously targeted companies including Nikola Corp. , the electric truck maker whose founder was later convicted of securities fraud, and Indian conglomerate Adani Group.

Short sellers profit when a stock falls. They do this by borrowing stocks that they believe are overvalued, selling them, and then replacing them at a lower price later.

Hindenburg also accused Block of facilitating fraud on its Cash App service, particularly when it came to government aid paid out during the pandemic. Public records that Hindenburg requested from states including Massachusetts and Ohio showed that a bank that partners with Cash App had a disproportionate number of suspect payments for unemployment benefits. 

Hindenburg said Jack Dorsey, Block’s chief and co-founder, has amassed a $5 billion personal fortune by taking advantage of Cash App’s users while “professing to care deeply” about them. 

Block’s shares closed Wednesday at $72.65. The stock is up more than 15% this year through Wednesday, though down more than 70% from its record high in June 2021.

Write to Peter Rudegeair at peter.rudegeair@wsj.com