What happened
Shares of StoneCo (STNE 0.64%) surged sharply higher Wednesday, jumping as much as 8.7%. As of 11:57 a.m. ET, the stock was still up 8.4%
The catalyst that sent the digital payments and fintech specialist higher was bullish expectations from a Wall Street analyst who began covering the stock.
So what
Scotiabank analyst Jason Mollin initiated coverage on StoneCo with a sector perform (hold) rating, but also issued a robust price target of $22. His new estimate would represent potential upside for investors of more than 41% over the coming year, compared with the stock's closing price on Tuesday.
Image source: Getty Images.
The bullish call came in the wake of StoneCo's disappointing third-quarter results, which didn't get a warm reception from investors. The company delivered total revenue that grew 57% year over year. At the same time, however, StoneCo's bottom line turned from a profit to a significant loss, but that requires a bit of context.
Earlier this year, StoneCo became a minority investor in Banco Inter, acquiring a 4.99% equity stake in the Brazilian digital payments provider. Since then, Banco Inter's stock has tanked, weighed down by the struggling Brazilian economy. This resulted in a non-cash loss for StoneCo of more than 1.34 billion reals (roughly $239 million at current exchange rates). Adjusting for the one-time nature of this write-down, StoneCo would have been profitable.
Now what
It's important to note that not everyone is optimistic on StoneCo's prospects for the rest of the year. Just yesterday, Grupo Santander analyst Henrique Navarro downgraded StoneCo to underweight (sell) from hold, lowering his price target to $17, down from $45. Brazil has been hit particularly hard by the pandemic and Navarro cited the economic trends as a headwind to StoneCo's growth potential.
With the emergence of the omicron variant and an already besieged Brazilian economy, StoneCo has been besieged by defaulting loans, forcing the company to temporarily suspended its consumer lending. Until we have more insight into how the company handles these challenges, investors might do best to wait on the sidelines.
