What happened
Shares of digital payments and fintech company StoneCo (STNE -0.26%) fell 12.3% in the month of July. The company was finalizing its acquisition of fellow Brazilian digital financial services company Linx during the month and issued new shares to help partially finance the deal, but the decline in stock price can primarily be chalked up to macroeconomic factors.
So what
Though the Delta variant of COVID-19 is quickly spreading in some parts of the world, total new cases in Brazil declined dramatically throughout the month of July. Latin America's largest economy is by no means out of the woods, but signs of recovery can be seen. Businesses are hiring again, and as economic activity rallies, inflation is also going up.
Image source: Getty Images.
Inflation is a longtime problem in many South and Central American countries, and out-of-control price increases can wreak havoc on the economy's stability. In response, Brazil's central bank had raised interest rates by 0.75% to 4.25% so far in 2021 and raised them again to 5.25% at the beginning of August in an attempt to keep prices in check.
For a high-growth company like StoneCo, higher interest rates lower the future value of the company's profits, so stock prices will typically fall to compensate in this type of situation.
Now what
Higher inflation and interest rates aren't the end of the world for StoneCo. If it can consistently outpace inflation over time, share prices will gradually rise again too. As a reminder, StoneCo reported 29% revenue growth in 2020 and a 21% increase in the first quarter of 2021.
Plus, while runaway inflation is not good for any business, a little inflation can be a positive thing for a company like Stone. As a digital payments company -- often compared to Square (SQ 0.51%) here in the U.S. -- Stone collects a percentage fee of every transaction it processes. Rising prices can thus equate to higher fees collected.
Stone will likely announce Q2 2021 earnings in late August or early September. Look for signs of a recovery in its financial results as it starts to lap the initial effects of the pandemic from last year, as well as a discussion from management on its plans following the acquisition of Linx and its complementary suite of financial services software. Shares are up 42% since the start of 2020.
