Shares of Brazilian financial technology company StoneCo (STNE 1.25%) plummeted by 53.9% in November, according to data provided by S&P Global Market Intelligence. During the month, the company reported financial results for the third quarter, in which it grew its revenue and customer base substantially compared to last year. However, falling profitability (among other things) had investors running for the hills.
Let's start with the good news: In Q3, StoneCo's revenue grew 57% year over year to almost 1.5 billion Brazilian reais (around $264 million), and it ended the quarter with almost 1.4 million active payment clients -- more than double the number it had a year prior. However, revenue wasn't as high as it could have been, considering the company's take rate declined from 2.36% last year to 1.66% this year.
Now the bad news. StoneCo had to write down the value of its investment in Banco Inter by a huge 1.3 billion reais. Moreover, all of StoneCo's expenses grew faster than revenue, causing its profitability to plunge. It recorded a net loss of almost 1.26 billion reais, compared to a profit of 249 million reais in 2020's Q3.
Macroeconomic issues are also plaguing the company at the moment. For starters, the Brazilian real has weakened by 7% in 2021 relative to the U.S. dollar. But StoneCo's stock is priced in dollars. Therefore, the financial results had a little less bearing on the stock price than they would have if the currencies' exchange rate had remained the same.
Furthermore, the inflation rate in Brazil right now is reportedly over 10%, which has investors nervous. Inflation can be good for the payment-processing part of StoneCo's business. But it's not good news for the lending part of the business. All of these things taken together, plus a broader market sell-off, caused StoneCo stock to plummet.
Take away the one-time paper loss on its Banco Inter investment, and StoneCo's profitability picture looks much different. On an adjusted basis, StoneCo's net income was 9% of revenue, despite all of the challenges during the quarter. That's nothing to sneeze at.
Indeed, StoneCo has proven that it can be a profitable, well-run business. In 2019, before the pandemic made things difficult, the company recorded net income of over 800 million reais, which was an outstanding 31% of revenue.
StoneCo is still growing its customer count and its revenue. And given the ongoing adoption of fintech solutions in Brazil, it stands to reason it can keep growing its revenues in the years to come. If Brazil's economy doesn't derail management's plans, and if it can get back to operational excellence, the stock price could go back up as it returns to profitability.