StoneCo (STNE 5.01%) is a high-growth fintech that's been struggling in several ways over the past few years. It has made important progress recently, and its stock trades at a cheap valuation. Let's see what to expect over the next year, and whether this is a bargain or a value trap.
The surprising Buffett stock
StoneCo is a Brazil-based fintech company focused on small business solutions, similar to Block's merchants' business. It has demonstrated meaningful sales growth over time, and although there was pressure early in the pandemic, it's now rebounded and landed in a strong place. Revenue increased 45% over the prior year in 2022 and 31% year over year in the 2023 first quarter.
Adjusted net income increased from 43 million Brazilian reals ($9 million) last year to 237 Brazilian reals this year in the first quarter, with the adjusted net income margin increasing from 2.1% to 8.7%.
There were many indications of an increasing and satisfied client base, which is the key to growth. Payment clients increased 47% over last year and 9% consecutively to nearly 2.8 million, and the take rate increased from 2.06% to 2.39%.
Warren Buffett has been in from the beginning, with Berkshire Hathaway taking a stake in the company's 2018 initial public offering. But the stock is down 57% since the first-day closing price.
Why aren't investors more enthusiastic?
StoneCo struggled in 2021. It had launched various products quickly, which strategically made sense. Many companies release complementary products and services to capture market share and increase revenue. But it was too much too fast, and the plan wasn't organized well enough to optimize efficiency. It also had the misfortune of coinciding with macroeconomic challenges like inflation, and management had to adjust pricing, balancing growth with maintaining viability. In particular, it had a lot of problems with its credit products. Deposits decreased and defaults increased.
Last year, the company had to restructure in many ways. Most importantly, it focused on pricing initiatives to generate stronger profitability. The increase in take rate, which is StoneCo's portion of fees from payments, mostly came from the pricing adjustments.
It worked to position its various products for increased efficiency. For example, it de-emphasized its key accounts, which are larger accounts that act as a sub-acquiring business and result in lower take rates for StoneCo.
It also sold most of its distressed loan portfolio as it applies more rigorous standards to that business. It started a new credit product with a small base that it says so far is meeting expectations. Client deposits increased 65% over last year, with the client base more than doubling from last year to 1.5 million.
StoneCo has also been going through many management changes, from a new chief executive officer in April to a new chief financial officer in May. A company facing challenges compounded by what could be a dearth of leadership appears to investors to be in a precarious situation, and betting on the situation to change isn't necessarily a responsible investment.
At this time next year, management is likely to be more stable. The company should be posting more consistent growth and sustained profitability. But none of that is a given. StoneCo could be dealing with similar challenges to today, especially if interest rates keep rising.
Is StoneCo stock a buy right now?
This could create opportunity over time. StoneCo is already showing signs of vitality in many others, and uniformly positive news should intrigue investors. In the meantime, the shares trade at about 2 times trailing-12-month sales. Real bargains, which have solid growth potential and a low price, don't stay that way for too long.
But I would wait right now, when there are plenty of other promising, cheap stocks that don't have StoneCo's issues. A year from now, if management is settled with leaders who inspire confidence and the company's new strategies look like they're paying off, it could be a stronger buy.
