StoneCo Overview
StoneCo Overview
Here are my thoughts on one of one of Latin America's best known fintech startups, StoneCo.
StoneCo is a Brazilian fintech company that offers payment processing and Point of Sale (POS) services.
It went public on the NASDAQ in 2018, and received backing in the form of an investment from Warren Buffet soon after.
Their goal? To be the “best financial operating system for Brazilian merchants.”
Business Model
StoneCo has 2 core segments:
Financial Services - Makes up about 80% of the company’s revenue and includes payment solutions and credit/digital banking accounts.
Software - Includes point of sale and digital solutions to help customers monitor their services.
The company serves a wide range of clients, including small and medium sized businesses, marketplaces, e-commerce platforms, and integrated software vendors.
StoneCo's business model combines financial solutions and software, giving them a unique position in the Brazilian market and allowing them to offer a superior value proposition to customers.
Financials
2022
StoneCo’s revenue growth has been impressive since 2018, going from $188 million back then, to $828 million in 2022 - a compounded annual growth rate of nearly 60%.
Despite this growth and the underlying business’s stellar performance, 2022 was a poor year for the company’s shareholders - the stock fell roughly 30%, yet another example of how irrational the stock market can be in the short term.
Thankfully 2023 has been better for shareholders.
Q2 2023
Revenue for the second quarter of 2023 grew 28% year on year mainly driven by:
32.0% increase in financial services platform revenues.
9.2% increase in software platform revenues due to POS and (Enterprise Resource Planning) ERP solutions.
Net income also rose to $63.8 million, up from a loss of $93 million in Q2 of 2022.
StoneCo ended the quarter with a net cash position of $869 million, an increase of $168 million over the $701 million it had at the end of 2022.
Outlook for Q3 is for total revenue growth of about 23%.
Investment Thesis
As mentioned, the company has grown its revenues from $188 million to $828 million over the past 5 years but despite this, its share price remains about 60% lower than where it was in 2018 and 90% lower than its all time highs.
The company’s lofty growth will inevitably start to decline soon but this isn’t anything out of the ordinary for a company that’s grown so fast in the past 5 years.
The Brazilian economy is also proving to be stronger than expected despite the political uncertainty. Its GDP growth in 2021 and 2022 was 5% and 2.9% respectively and the momentum seems to be carrying into 2023, with GDP growth predictions revised up from 2.5% to 3.2%.
Its average age is just 32, and with a population of 214 million, there’s plenty of room for growth.
StoneCo’s management has plans for growth, further product integration, and cross-selling (see the company’s progress highlights above).
The company hasn’t even started looking abroad yet - management believes there’s still plenty of room for domestic growth.
Conclusion
StoneCo’s share price has hovered between its all-time high of $92 and its current $13 for the last two years, despite the excellent performance and growth of the underlying business.
Its vision of becoming the comprehensive software and financial services provider for merchants in Brazil offers huge opportunities for expansion.
The impressive growth and now-reasonable valuation metrics raise questions: Am I overlooking something, or is the market unaware? Perhaps it’s a bit of both.
As with any investment, risks remain. There's always the chance that competitors might step up their game or a new player, perhaps a large foreign tech giant, could dominate Brazil's small business tech scene.
The Brazilian economy also faces challenges, but to me at least, the risk/reward of investing at the current stock price seems attractive. The valuation isn’t expensive and the company is growing quickly, albeit slower than before.