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This Warren Buffett-Backed Fintech Company Continues Its Impressive Growth

By Danny Vena - Updated Mar 3, 2020 at 4:48PM

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Digital payments specialist StoneCo just released Q4 earnings and they again exceeded expectations.

One of the more closely watched young players in the emerging fintech space is StoneCo (STNE -22.30%), the Brazilian company backed by Berkshire Hathaway (BRK.A -2.24%) (BRK.B -2.30%) and its acclaimed CEO Warren Buffett. Since StoneCo went public in late 2018, its stock has gained 39%, more than tripling the 12% gains of the S&P 500 during the same timeframe.

StoneCo released its fiscal 2019 fourth-quarter financial results after the market close on Monday, and its consistently impressive results continued. The company reported revenue of 783 million Brazilian reals (about $175 million), up 48% year over year. This easily surpassed the $172.6 million expected by analysts. Adjusted net income of 275 million reals (about $61.5 million) climbed 76% year over year. This resulted in earnings per diluted share of 0.94 reals ($0.21), also exceeding expectations of 0.89 reals ($0.20). 

Warren Buffett smiling surrounded by people.

Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.

Improving metrics

The company continued its unbroken streak of significant improvements in each of the key operating metrics it provides. Total payment volume (TPV) -- the total value of payments processed for customers -- grew to 40.2 billion reals (about $9 billion), up 51% year over year. StoneCo's active client base grew by more than 66,000 during the quarter, climbing to 495,100, up 84% year over year. The take rate -- the percentage of every dollar the company keeps from each payment transaction it processes -- clocked in at 1.80% in the fourth quarter, slipping from 1.88% in the prior-year quarter, but declining just 8 basis points.

Each of StoneCo's revenue segments also saw robust improvement. Transaction activity grew to 230.4 million reals (about $51 million), up 32% year over year, the result pf higher TPV. Subscription services and equipment rental of 91.6 million reals ($20.4 million) increased 31.8%, mainly attributable to the increase in small- and medium-sized business (SMB) active clients, and partially offset by subscription incentives to attract new clients. Financial income of 404.1 million reals ($90.3 million) climbed 58% year over year, mainly the result of the increase in TPV. Other financial income of 56.9 million reals ($12.7 million) soared 109%, the result of the interest income from the IPO proceeds on StoneCo's cash balance and its short-term investments.

For the quarter, costs as a percentage of revenue were 39.6%, down about 3% compared to the prior-year quarter, as the company invested heavily to expand its operations. This resulted in net margins that improved to 31%, up from 19% in the year-ago quarter, and the highest margin in StoneCo's history.

Buffett can't actually take the credit

Buffett's Berkshire Hathaway invested $340 million to acquire 14,166,748 Class A shares of StoneCo, piggybacking on its IPO, at roughly $24 per share. The move raised eyebrows at the time, a departure from the type of company Buffett would typically choose. Reports later confirmed that it was one of Buffett's portfolio managers -- Todd Combs -- who had made the investment decision. 

Brazil is a largely cash-based society and nearly 1 in 3 Brazilians don't have a bank account, allowing StoneCo to offer its services to the unbanked, a population that amounts to about 45 million people. That gives StoneCo a market ripe for disruption and the company is delivering impressive growth on all the metrics that count.

 

Danny Vena has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool owns shares of Stoneco LTD and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short March 2020 $225 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

StoneCo Ltd. Stock Quote
StoneCo Ltd.
STNE
$9.06 (-22.30%) $-2.60
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$447,154.99 (-2.24%) $-10,245.02
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$297.28 (-2.30%) $-6.99

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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