Not everything Warren Buffett touches turns to gold, and he'll be the first to admit that he has made many mistakes. He said pretty bluntly in Berkshire Hathaway's most recent shareholder letter, "I make many mistakes."
And even though he has said that his favorite holding period is forever, that doesn't mean he doesn't know when it's time to say goodbye to either underperforming stocks or those that aren't suitable for his current investing strategies. You don't need to look further than Berkshire's first-quarter 13F filing to see that it closed out four positions and trimmed another eight.
StoneCo (STNE 5.01%) is one stock he's holding on to. The Brazil-based fintech has been posting mixed operating results as it tries to grow its business, and its stock is down more than 50% from its first-day closing price in 2018. However, it's up 42% so far in 2023, and its valuation is climbing as well. What does that mean for investors?
Strong growth, improving profitability
StoneCo offers fintech solutions for small businesses in Brazil. It has an offering similar to Block's sellers program, and it has branched into other financial services, such as banking. It emphasizes digital integration and omnichannel solutions.
It has demonstrated robust growth over the past few years, but it has struggled with profitability, regulatory changes, and management shifts.
Revenue increased 31% over last year in the 2023 first quarter, and total payment volume (TPV) increased 25%. Adjusted net income increased 456%, and adjusted cash flow was up 57%. Those are certain signs of progress, with continued strong growth even as profitability improves.
Image source: StoneCo.
Huge opportunities in a niche fintech market
Management recently restructured into other segments as it rolls out new products and services. The financial services platform accounted for most of the growth, with a 35% increase in revenue, balanced by a 10% increase in software revenue.
New clients are its biggest growth driver overall. There were 234,000 new active payment clients in the quarter for a total of 2.8 million. Take rate, which is the fee from services that StoneCo takes as a percentage, increased from 2.06% to 2.39%. That huge jump is obviously positive, but investors are also concerned about how the company can keep growing it.
The focus on expanding into products and services is leading to higher client activity rates as well as overall revenue growth. Active banking accounts increased from about 700,000 in the 2022 fourth quarter to more than 1.2 million in the 2023 first quarter, which management attributed to higher adoption of a new product. Small-business average revenue per active client (ARPAC) increased 10% from last year. But that figure was down from the fourth quarter of 2022 as it brings on new, smaller clients that sign up for less extensive plans that generate less revenue.
What is there to worry about?
Despite its tremendous progress, it hasn't escaped the impact of inflation. Its software business is experiencing pressure due to increased selling expenses and a slowdown in advertising sales.
More broadly, the company is still reorganizing itself and has a lot of moving parts. It recently brought on a new CEO after several other changes in management. StoneCo has a strong brand name, a competitive and popular business, and a lot of opportunity. Its home base, Brazil, is the largest country in Latin America and one of the largest in the world, with a population of more than 200 million. But the company is in flux, and so it faces more risk than the standard company dealing with inflation and attempting to sustain profitability.
Is StoneCo stock still a bargain?
If the question is whether the stock is cheap, then the answer is yes. It trades at a price-to-sales ratio of less than 2. But that doesn't necessarily make it a bargain.
There's a lot to like about StoneCo, and it's making impressive progress in both growth and profitability. Right now, though, there might be other investing options that look more like surefire bets. I would keep it on your watch list and see how the next few quarters play out.
