Shares of Brazilian financial technology (fintech) company StoneCo (STNE -0.95%) are down over 80% from their all-time high earlier this year and there are a lot of good reasons for this. In this video from Motley Fool Backstage Pass, recorded on Nov. 29, contributors Matt Frankel, Jon Quast, and Jason Hall discuss some of the problems the company is facing. However, they agree that this could be a good buying opportunity.
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Matt Frankel: StoneCo, ticker symbol, STNE. We all ranked this pretty decent, Jon ranked it a little lower than Jason and I did. But we all put this one toward the middle of our pack.
StoneCo, the best way I can describe it, it's the Brazilian version of Square. This is also the worst-performer out of the nine stocks on this list. By a significant margin; it's down to 83% from its 52-week high. This is a Warren Buffett stock notably. Buffett and his team, not Buffett directly, but someone on his team bought it right after the IPO, like a day after. For a time in early 2021, it was one of his best performers. That's no longer the case. It's down 83% from the high.
It's fallen for a lot of the reasons that PayPal and Square are off of their highs. Brazil is just more sensitive to a lot of things economically than we are. Their inflation rate's ticking up even faster than ours, their interest rates are rising faster than ours. That doesn't really affect the payment processing business. As Jon said, inflation is good for a business that gets a percentage of transaction volume.
It does affect their credit business. They make small business loans. Most of them are backed by the company's own debt. If customers default on those, it's really a bad thing. The interest rate they're paying on that debt continues to rise. I mentioned interest rates are rising faster. They've been really hesitant to raise interest rates on consumers, which is a mistake in my opinion. They're worried about customers leaving if they start charging too much interest, which may happen, but you have to if you want to protect your business.
The payment processing business is healthy, big untapped opportunity in Brazil. We've seen the numbers from companies like MercadoPago, which is a rival of theirs in a lot of ways, it operates in the same market. It's a big untapped market in Brazil. Payment volume more than doubled year over year in the most recent quarter. That wasn't a great comp because of COVID, but still pretty impressive. They have more than 1 million small business customers. I want to say Square was about 3 million. It's a pretty large-scale business.
This is one that is toward the top of my buy list right now. This was my No. 3 out of the pack just because I perceive it as a little riskier than my No.s 1 and 2. I think it could easily go down. There is a lot of currency risks. A big reason for the underperformance is the currency risk. The Brazilian real has weakened dramatically against the dollar. That's a big part of the underperformance as well. Curious as to what you guys think of this.
Jason Hall: Jon, go ahead and weigh on and I will just go straight into our next one after that.
Jon Quast: For me, Matt, I agree with you. I think this is a company that is actually really piquing my interest here. The only reason that I am not pulling the trigger right at this moment and the reason I ranked it a little bit lower than you guys is, I am really concerned, one, about the Brazilian economy first and foremost, not so much about StoneCo. I think they have a good management team, I think they've stumbled. They've made a few mistakes. I think they'll bounce back as a management team, I really do.
The Brazilian economy, it's going to be a challenge for that economy. The inflation that you talked about, that does hurt them more than it hurts other companies that are very similar to them because of the loans that they're making being backed by their own debt. That is something that worries me about this. But on a fundamental basis as you look at their customer growth over the past year that they showed in the most recent quarter, I mean, that's still trending in the right direction. You love to see that. I think that generally speaking, this is an economy that is very, very early in its digitization of its cash, so that plays in its favor. They've shown that they can do this profitably. Is the economy in Brazil going to be too much for them to overcome. I'm worried about that today, but man, it's getting very, very interesting here. I think it said its all-time low.
Hall: Yes, it's close to it. Just to get through it quickly here. It feels to me the investors de-risked by selling when they did. But I think there's a lot of assuming a worst-case scenario with what happened.
Just to put this in perspective, not long after they reported earnings and the stock gets just absolutely smashed, about a week and a half ago. I bought, and it was my second-largest single investment into a stock that I've ever made. I really think it was a major overreaction. I think over 10 years, it's going to pay off really well. There is certainly risk there. I rated it my No. 2 on this behind Zoom because I think the risk adjusted potential returns for Zoom are higher with that risk. I think it's really cheap for this business, but there is risk.
