Block (SQ 2.32%) fell out of favor with investors near the end of 2021. The deterioration in investor confidence can be linked to reasons like:

  • General market volatility related to macroeconomic issues like the COVID-19 pandemic, elevated inflation, the war in Ukraine, supply chain disruptions, trade tensions with China, bank failures, and more.
  • A lack of global standards where regulators in every region and country offer up different solutions to address their citizens' problems, leading to unique regulations in each market This can hinder the pace of growth in the payments business, particularly for smaller companies like Block.
  • Big changes in the global financial system, including threats to the dollar's dominance as the world's reserve currency, the consolidation of economic power among a small number of large global banks, and the potential adoption of central bank digital currencies.

All of the above could negatively impact Block's business model. Despite these aforementioned challenges, this financial services stock is still worth a closer look. Here's why.

Block is a pioneer in open protocols, particularly Bitcoin

Block was an early adopter of open protocols, driven by CEO Jack Dorsey's belief in its potential to transform payments and the rest of the financial industry. Open payment protocols refer to the non-proprietary rules and standards that facilitate the interoperability and exchange of value between different payment systems and platforms without intermediaries or centralized authorities. This approach can help mitigate the concentration of economic power in too few hands while promoting greater transparency, efficiency, and security, all while reducing costs.

During the company's first-quarter 2023 earnings call, Dorsey discussed the potential benefits of open protocols to help counter the issues referenced in the introduction. He said he believes that open protocols can help to create a more resilient and equitable economic system. They can help to reduce the risk of systemic shocks, promote competition, and give individuals more control over their finances. Open protocols also offer advantages specific to Block. 

One significant benefit is open protocols improve Block's ability to compete with larger financial institutions. Open protocols provide Block with a foundation that is not controlled by any single entity, enabling it to build products and services with greater flexibility and agility. In contrast, larger competitors are often bound by proprietary systems, potentially limiting their innovation potential. They can also improve the security of Block's products and services by minimizing intermediaries and potential points of failure in payment transactions, thereby reducing fraud and corruption risks.

The open protocol that Dorsey believes in the most is Bitcoin (BTC -0.60%). In 2014, Block became one of the first major companies to enable merchants to receive Bitcoin from customers. Since then, it has expanded its Bitcoin offerings to include Cash App, one of the world's most popular mobile payment apps that facilitates buying, selling, sending, and receiving Bitcoin. Furthermore, it has established Spiral, formerly Square Crypto, an open-source initiative focused on building and funding Bitcoin development projects to make the cryptocurrency mainstream; and TBD54566975, a new business aiming to develop decentralized Bitcoin products and services. 

If Dorsey succeeds in establishing Bitcoin as a mainstream currency, he could revolutionize the payments industry.

Competition is a considerable risk for Block

The payments industry is highly competitive, with many large and well-established players, including Visa, Stripe, Apple, and Adyen. Although Bitcoin could level the playing field between Block and much larger payment companies, it is not invulnerable to competitors.

Many other companies are also developing Bitcoin-based products and services. Some of them have more experience and resources than Block, and they could potentially pose a threat to Block's businesses. For example, PayPal and Mastercard are major payment companies investing heavily in Bitcoin. These companies have large customer bases and global reach, which could give them an advantage over Block.

Additionally, some smaller Bitcoin-based companies are emerging. These businesses might be more agile and innovative than Block, which could give them an edge in the competitive Bitcoin market.

Why investors should consider buying Block

Despite facing competition in the Bitcoin and payments market, Block has several advantages:

  • It is a well-established company with strong brand recognition, extensive experience in the payments industry, and a large, devoted customer base. 
  • It has a diversified portfolio of products and services catering to different Bitcoin market segments, such as consumers, developers, artists, and entrepreneurs.
  • It has a visionary and influential leader in Jack Dorsey, a vocal advocate of Bitcoin.

Finally, Block has a strong balance sheet, with $7.6 billion in available liquidity against $4.83 billion in long-term debt and operating lease obligations at the end of the first quarter. The company also generated $262 million in positive free cash flow (FCF) by the end of Q1 and $79 million in trailing-12-month FCF. And with it producing almost $6 billion in gross profit and $991 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2022, it has a strong business. If Block can continue to innovate and grow, it could remain a significant player in the Bitcoin and payments market.

Many consider Block stock undervalued at a price-to-sales (P/S) ratio of 2.1, well below its median P/S ratio of 6.3 in the last 10 years. If you believe in Jack Dorsey's vision for Bitcoin becoming a dominant global currency, investing in this company should be a strong consideration.