The situation in South America's largest economy is bad and growing worse. Brazil now has the second-highest number of COVID-19 cases in the world (trailing only the U.S.), confirmed deaths from the coronavirus are on the rise, and the government's response, led by President Jair Bolsonaro, has been anything but consistent.

The U.S. has put travel restrictions in place for the country. Yet even with Brazil's economy heading downhill, StoneCo (NASDAQ:STNE) -- which Warren Buffett and Berkshire Hathaway own a roughly 5% stake in -- is still executing on its growth strategy.

The disruptive digital payments and e-commerce services company's first-quarter results were exceptionally good ... up until mid-March when the wheels started coming off the global economic wagon. But its business has since started to rally, which was more than welcome news for shareholders.

A woman in a store using a Stone point of sale card reader.

Image source: StoneCo.

A wild start to the year

Much as other digital payment businesses have reported, StoneCo said its business was performing well up until mid-March. After that, total payment volume (TPV) started to head lower. In total, though, the company reported 42% year-over-year growth in TPV to 37.6 billion Brazilian reais ($7.08 billion based on exchange rates as of May 27).

Revenue in the quarter grew 34% to 717 million reais ($135 million), while adjusted net income was down 13% to 162 million reais ($30.5 million) due to rising expenses from investing in new lines of business. Free cash flow (revenue less cash operating and capital expenses) was 250 million reais ($47.1 million) compared with negative 362 million reais (negative $68.2 million) a year ago.

Also in the quarter, the company added 50,500 new clients to bring its total count to 531,300 as of the end of March (excluding TON). The company's new TON business for micro-merchants (which only began operating on March 1)  ended the period with 23,200 active customers. Overall, not a bad way to start the year -- especially considering the macroeconomic situation.

This quarter may not be terrible after all

StoneCo doesn't typically provide extensive guidance, but it did offer investors some insight on its TPV trends that shed light on what the second quarter might look like. While payment volume in the second half of March wasn't great, it started to recover in April and has been back in double-digit percentage growth territory in May. With just one month left to go, the second quarter may actually look pretty decent.

A chart showing 52% TPV growth up to March 15, -4% the second half of March, 9% in April, and 23% in May up to the 23rd.

Chart by author. Data source: StoneCo.

The quick rally in TPV, even amid the coronavirus pandemic, speaks to StoneCo's strength and just how disruptive a force it has become in South American e-commerce and banking. The company said that 51% of all e-commerce transactions in Brazil flowed through its ecosystem in Q1, and its new digital banking products have made it the go-to service provider when it comes to filling its customers' money management needs -- from basic checking to new credit services. Its online portal makes StoneCo a one-stop-shop for businesses in Brazil, with a platform that can handle everything from marketing to point-of-sale to basic banking.

As for its credit service, that does introduce a new element of risk. With Brazil's economy suffering even more so than it was pre-pandemic, business loan defaults could become a problem. The company has said it avoids lending in segments of the economy where the risks of default are higher, and it uses its tech platform to extensively screen credit customers. Payments due are also directly deducted from customer sales, which adds another layer of safety. It's a segment worth keeping an eye on.

But so far so good. As of mid-May, StoneCo's customers were in good shape and making payments (although its collections ran at only 83% of the expected total in March); and return on assets in the credit portfolio was at 2.7% per month as of April, which includes an elevated rate of payment delinquency. As of the moment, StoneCo's credit division is doing just fine.

A final point worth noting is that StoneCo has increased its cash net of debt and credit liabilities, to 5.05 billion reais ($950 million) as of the end of March, up from 4.98 billion reais ($940 million) a year earlier. This fintech, therefore, has ample liquidity to navigate these challenging times. Investors should expect growth for the balance of 2020 to be far slower than it was in the recent past, but the company's disruption of the payment and banking sector in Brazil is still paying off. The need for digital solutions is greater than ever, and Stone is making the most of the situation.