Investors in Brazil's leading financial services technologist, StoneCo (STNE 0.32%), are having a rough go this year. At Wednesday's prices, the stock was down 14% over the past 12 months and down almost 49% so far in 2021, even as the stock market overall continues to make new all-time highs.
Thus, if you've been waiting for the market to pull back before going shopping, you need not wait any longer. A consortium of problems has affected Stone as of late, but the company remains in good shape and is still growing its core business at a healthy clip.
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Political, macroeconomic, and technical issues abound
Although Brazil, South America's largest economy, has been deeply affected by the pandemic, its problems this year have been mostly political and economic in nature. Brazilian president Jair Bolsonaro has been in a battle with other elements of the government ahead of elections next year, creating some uncertainty for the stability of the country.
Additionally, as life has begun to normalize during the pandemic, inflation has been back on the rise. High rates of inflation are a persistent problem in emerging economies in South America and can reduce the value of a company's profitability over time.
Adding to the problems outside of Stone's control is a technical issue with Brazil's new credit registry system. As a reminder, Stone has been building its credit business for about two years now, issuing loans to its small and mid-sized business customers based on receivables (which Stone has great visibility on, since it's first and foremost a digital payments company).
However, the country's credit registry system started malfunctioning, and some parties on the system were not complying with Brazil's new rules for loan collateral and settling of funds. For now, Stone has opted to freeze the issuance of new loans for at least another three to six months until these issues have been fixed.
The result? Stone's Q2 2021 revenue fell 8% year over year to 613 million Brazilian reais (about $119 million using the Brazilian real to U.S. dollar exchange rate on Sept. 7, 2021). The credit business impact reduced revenue by some 397 million reais in the period ($76.8 million). Adjusted net income was negative 151 million reais (negative $29.2 million) due to the credit segment as well as higher spending to promote growth elsewhere in Stone's operation. Adjusted net income in Q2 2020 was positive 150 million reais.
Digital payments and fintech are still in growth mode
Despite the myriad issues that have sunk Stone's stock this year, the core business is doing more than just fine. Excluding credit, total revenue would have otherwise increased 68% year over year in Q2 2021 -- driven by a 59% increase in total payment volume. When including micro merchants in its core small and mid-sized business customer base, Stone's total active digital payments clients more than doubled from a year ago and reached nearly 1.05 million.
With credit temporarily sidelined for a while, the digital banking business is likely to be a drag on Stone overall for the next quarter or two. However, financial services and e-commerce software is a new promising front. Stone said subscribers reached 143,000 in Q2 (compared to just 35,000 last year).
And starting in Q3, the Linx software company that was acquired in July will be included in overall results. Management said adding Linx's software revenue to its own brought in an annualized 1.2 billion reais ($230 million) with lots of opportunity to cross-sell services with its existing customer base.
Long story short, Stone is still a growth company in spite of the recent credit business stumble, and it's well-positioned to continue expanding at a rapid pace as it helps get Brazil's economy adapted to a new digital era. Cash and investments totaled 14.2 billion reais ($2.75 billion) at the end of June, offset by debt and other long-term obligations of just 5.39 billion reais ($1.04 billion).
Stone is trading for about 55 times trailing 12-month earnings. It's a premium, but it's also right around the fintech's cheapest valuation in its three-year history as a public company (except during the early days of the pandemic last year). With plenty of promise ahead for expansion and the credit business set to rebound eventually, this looks like an opportune time to go shopping.
