It's been a rough year for StoneCo (STNE -2.12%) investors. Shares of the company are down nearly 80% over the past six months alone. But does StoneCo's financial performance warrant the steep sell-off investors have been experiencing, or could now be a time to capitalize on this stock on sale? In this segment of Backstage Pass, recorded on Nov. 17, Fool contributors Brian Withers and Nicholas Rossolillo discuss the company's third-quarter earnings report and its potential as an investment. 

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Brian Withers: If I look at the stock today, I would guess that the market didn't like the earnings report. [laughs]

Nicholas Rossolillo: No, indeed they did not. Take a look at that chart. They haven't liked much about StoneCo for the better part of a year though. Down 67% in the last year. Almost 35% today alone after third-quarter earnings yesterday afternoon. Let's talk about this, Brian, because StoneCo is a mess at the moment if you're looking at it especially from a very superficial standpoint. But some of the highlights, third-quarter revenue was actually pretty good, 1.47 billion real or reais plural, that's Brazil's currency, equates to $270 million.

The analyst consensus was 1.43 billion reais. They actually beat on revenue. Adjusted earnings per share though, missed the consensus. That's adjusted, let's talk about the unadjusted figure because I think that's where the story comes into play. StoneCo reported a massive unadjusted net loss for the quarter, 1.26 billion net loss in Brazilian currency in the real. That was all because of this investment write-down they had to take. Basically, what happened is back in the spring of this year, StoneCo took a 5% equity stake in this digital lender in Brazil called Banco Inter.

It started out pretty well, shares of that company down in Brazil went higher in the second quarter. But then Brazil's economy took a turn for the worse starting this summer. Their recovery from the pandemic and it stalled out. The economy is facing double-digit unemployment, interest rates are sky-high. This is a theme with some economies in Latin America, as you get these inflationary forces paired with high unemployment, so the Central Bank has had to hike interest rates.

Basically, the Banco Inter stock tanked in the third quarter. That's where this big net loss is coming from. It's non-cash because it's just an equity stake. Over $1.2 billion net loss reported. I think that's where the market is starting to get hung up by this right now. Brazil's economy is a mess. It looks like it's going to continue stagnant into next year.

At least according to their central bank, there are anticipating maybe one percent GDP growth at best. It's just not looking good. But the upshot here is StoneCo the business is actually doing just fine. Their actual digital payments user-based more than doubled year-over-year. Part of that is because of the Banco Inter investments that they made.

They made the investments to coax users onto their platform. It's working. They have a software business now. They acquired a software business to complement their digital payments platform to help consolidate small and mid-sized business spending with StoneCo. There was definitely a mixed bag. But it's going to be messy for a bit, though.

Withers: It's interesting they are focused on the unbanked population in Brazil, which is huge providing payments, and do they do cash management steps, they act as a bank account as well?

Rossolillo: Right. There's also some hiccups that came up earlier this year with that as well. They have the software to help manage finances as well, but they've got it into credit. They started up this credit arm earlier this year and then they said they were going to deposit. Also again, there's very technical, but behind the scenes Brazil is updating its digital payments platform. The country overall is the back-end infrastructure that handles movement of digital money.

StoneCo took a step back and said, "We're not doing that for a while" and so now where there was revenue from their credit products, suddenly there's no revenue at the moment. They're focused on banks though. Brian, I know one of your favorites is MercadoLibre, a quality company, trying to bring Latin America up into up with the times, into this digital economy.

Can have some horrible swings up and down in value, but the business itself can still be solid, and I think that's what's going on here with StoneCo. Even though the economy has hit the sketch for the time being, StoneCo is doing fine. They're helping lots of people enter the digital economy and helping small businesses update their operations.

Withers: You're thinking maybe today's stock movement is a bit of an overreaction then?

Rossolillo: I think it's definitely a knee-jerk reaction and it's that net loss. There's a big difference though, between an unrealized. We know this as investors, a loss isn't truly a loss until you sell a stock and realize the loss. That's basically what StoneCo is reporting here. It's an unrealized loss on an equity investment they made.

Withers: My wife calls that fake money. [laughs]

Rossolillo: It is fake money until you sell it.

Withers: Until you sell it, that's right. Awesome. Well, I appreciate the update on StoneCo. This is one to watch I think for a long, extended period. The market for them is just massive.