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Why Warren Buffett's Brazilian Fintech Stock Is a Buy and Hold for the Next Decade

By Aditya Raghunath - Updated Mar 5, 2020 at 10:41AM

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Here's why you need to replicate this Berkshire Hathaway buy for your portfolio.

In uncertain times, investors who have a diversified portfolio stand to benefit. The Dow Jones Industrial Index and the S&P 500 experienced a massive sell-off in the last seven trading sessions of February 2020, when investors lost trillions of dollars.

This sell-off was triggered after investors grew concerned over the rising impact of the novel coronavirus outbreak. The virus has spread to about 50 countries and claimed 3,000 lives as of Feb. 29. 

Investors are worried about a slowdown in consumer spending, which could drive demand lower at a global level if the virus continues to spread. So, where do you invest in such a volatile scenario? With bond yields at record lows, is it time to look at international stocks that can beat the market consistently and provide diversification?

StoneCo is a high-growth fintech company

StoneCo (STNE 0.33%) is a Brazilian-based fintech company that provides end-to-end, cloud-based technology solutions to businesses. The company aims to transform the way small and medium enterprises (SMEs) use software and financial services to grow their business.

Image shows a digital payment transaction

Image Source: Getty Images.

StoneCo sells solutions to integrated partners such as payment service providers, and also developed a distribution solution to serve clients by developing Stone Hubs. These hubs include a cohesive team of sales and service support staff to engage local SMEs.

According to the company's presentation, Brazil is the fourth-largest payment market in the world. With over 170 million consumers and 8 million SMEs, the Brazilian electronic payments penetration is expected to grow to 43.5% at the end of 2019, up from 32% in 2016. 

Government regulations across the globe are supporting the digital payment model, and this shift will be a key driver for StoneCo's top-line growth. StoneCo announced its fourth-quarter results on March 2, and its revenue growth was solid at 47.9% year over year. Comparatively, its adjusted net income was up 76.4% in the fourth quarter. 

At the end of 2019, StoneCo's active client base was up 84% at 495,100 while the total payment volume (TPV) rose 51.4% to approximately $8.9 billion. This growth was driven by the net addition of clients that rose from 140,000 in 2018 to 220,000 in 2019. 

Another encouraging factor for growth investors is StoneCo's profitability. While several growth stocks are struggling with high valuations and mounting losses, StoneCo ended 2019 with a net margin of 31% . You can see why Warren Buffett's Berkshire Hathaway has a 4.3% stake in StoneCo. 

The stock gained close to 10% shortly after announcing its quarterly results. This gain was driven by a strong quarter, coupled with the broader market movement.

The market opportunity is huge

Similar to most emerging economies, Brazil also presents huge growth opportunities in the digital payments space. According to Statista, the digital payments segment in Brazil is forecast at $54 billion in 2020, up 13.6% year over year. 

The total transaction value is estimated to grow at an annual rate of 11.8% between 2020 and 2023 to reach $75.5 billion. This shows that Brazil's payment processing market has huge potential over the long term, and StoneCo is set to benefit from its growing market presence in the country.

Wall Street analysts have forecast StoneCo sales to grow by 40.4% in 2020 and by 28.6% in 2021. This growth will also help the firm improve earnings by 40.5% this year and by 32% in 2021, according to consensus estimates.

The verdict

StoneCo shares have returned close to 100% since its IPO back in October 2018 . The company continues to invest heavily in merchant acquisition, which is a key driver of top-line growth. It has successfully expanded its product portfolio to include software support offerings, and can now focus on consumer lending services.

Consumer lending will most likely be a huge success given that credit is scarce and expensive in most emerging economies. The number of clients using StoneCo's credit solutions has grown by 3.6 times in just a quarter. 

Brazil is the most populous country in Latin America. Its fast-growing economy, coupled with the long-term potential in the digital payment space, makes StoneCo a solid bet for growth investors looking for diversification.

Aditya Raghunath 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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