A mixed quarter of earnings, a 1.3 billion reais investment write-down, declining profitability, and fresh challenges posed by the struggling Brazilian economy have created a perfect storm for StoneCo (STNE 0.26%) stock. In this segment of Backstage Pass, recorded on Dec. 3, Fool contributors Toby Bordelon and Rachel Warren answer a member's question and discuss the stock's recent sell-off.
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Toby Bordelon: Before we move on, do either one of you follow StoneCo at all? I don't that closely, I'm unaware. I wanted to at least acknowledge Prakash's question here. Do you think StoneCo is oversold? I don't follow close enough to give you an intelligent answer to that. I was looking a little bit about on this some of the valuation metrics, stock sold off quite a bit.
Let's look, it's come way down, stock has come way down from its highs. I want to say we're about where? [laughs] Maybe a little lower than we were three years ago. This is one when I see a massive change like this, not just like a pullback from over-exuberant highs potentially of one year but going back a while, that makes me want to do a little more research into it before I say yeah or nay on it.
Rachel Warren: I can jump in really quick on this. I don't follow the stock super closely but I was reading a little bit. The company, I think shares dropped more than 50% in November, if I've got that right and it had a mixed third quarter.
The company's revenue was up 57% year over year and it about doubled its active payment clients compared to the year-ago period. It seems the sticky point for investors has been the fact that profit margins has been declining for a while and its take rate was down. That seems to have driven a pretty bumpy month for it in November. I'd have to see a few more quarters just to make a better judgment.
Bordelon: We've seen a little bit of that from other stuff I've looked at in this earnings season, some Deep Dives I've done where you see revenue growth but you see that revenue growth coming at a higher cost. It's costing them more to get that and you start to wonder about those margins.
We see margins deteriorating, you start to wonder, is that permanent? Are you just having to pay more for your additional revenue? Is the easy revenue all gone, and what does this business look like on a cost standpoint in the future?
If you've got a company where they are not profitable right now, and you see then that cost of sales going up even more, then you start to worry, wait a minute, you're growing but you're not profitable and your costs are still going up higher than your revenue. That's really a concern, I'm not sure that's necessarily the case with StoneCo but that's something to look at. You always want to keep a look on how costs are tracking with revenue growth.
Ideally, you want revenue to grow faster than your costs on a percentage basis, that's healthy. To some extent in your early lifecycle, you need to spend money to make money, as it were, but eventually, your costs need to get under control relative to your revenue growth or you going to have a problem.
