Warren Buffett and his team have made some small moves into Latin American fintech companies in recent years. It's an interesting trend, considering that the Oracle of Omaha is more known for value-oriented picks than high-growth tech stocks.
Berkshire Hathaway invested in StoneCo's (STNE 5.01%) initial public offering in 2018 and owns 3.4% of shares. The Latin American fintech has gone through some struggles since then and has fallen more than 80% from its highs in 2021. Let's see how it's doing today and whether to follow Buffett into StoneCo stock.
A huge opportunity in Latin America's biggest market
StoneCo offers business solutions for companies across Brazil, with a focus on digital and small businesses. It started with a payments business targeting small and medium-sized businesses and now offers payments, banking, software, and credit packages for businesses of all sizes. It's comparable in many ways to Block's Square seller's business or PayPal's merchant services business.
Not only is it broadening its reach by targeting a larger range of businesses, but its large suite of services encourages higher engagement, leading to more product adoption per user and generating higher revenue without increasing costs. And as it gains a reputation for offering all-in-one packages, it attracts more businesses looking for these kinds of solutions, which by default cost more money. In the 2023 third quarter, 28% of new users were signed up for at least three products, up from 12% from the year-before cohort.
It's done a great job monetizing its client base with continued opportunity. For example, its heavy users provides 2.3 times the average revenue of overall clients, and this base increased from 14% last year to 21% this year in the third quarter.
Brazil is the largest country in Latin America by population, and it has the highest share of the e-commerce market, at nearly 30%. It's also forecast to have the fastest e-commerce growth of any country in the world, according to Statista. These are organic growth levers for StoneCo, and it's pushing them with its new products and services.
Moving past the past
StoneCo stumbled when it was late to raise rates to match inflation, reducing its profitability. It was also hurt by legislation that affected how it can report certain items. Despite revenue growth that has remained robust, investors were disillusioned by these missteps and sent StoneCo stock stumbling.
But StoneCo has rebounded. Revenue growth remains strong and was up 25% over last year in the 2023 third quarter. Profitability is improving again, with adjusted net income up more than 300% from last year. Generally accepted accounting principles (GAAP) net income increased 109%.
In its quest to demonstrate that it's back on track and give investors reasons to be confident about the future, management recently released a set of midterm goals with expected compound annual growth rates (CAGR).
| Metric | 2024 | 2027 | CAGR |
| Micro and small business (MSMB) TPV (in Brazilian R$) | > 412 | > 600 | 13% |
| Client deposits (in Brazilian R$) | > 7.0 | > 14.0 | 26% |
| Credit portfolio (in Brazilian R$) | > 0.8 | > 5.5 | 90% |
| MSMB take rate | > 2.49% | > 2.70% | - |
| Adjusted net income (in Brazilian R$) | > 1.9 | > 4.3 | 31% |
| Administrative expenses (in Brazilian R$) | < 1.125 | < 1.450 | 8.8% |
Data source:
Should you buy StoneCo stock?
StoneCo is harnessing its huge growth opportunities and generating client loyalty, higher revenue, and sustained profit.
StoneCo stock is up more than 60% this year, and at the current price, it trades at a forward one-year price-to-earnings ratio of 17, which is cheap for a high-growth stock.
Investors are assigning it this low valuation because there's risk involved. StoneCo has made some mistakes, and it recently got new management to stabilize its recovery efforts. Although that's a good thing, it also adds to the volatility.
StoneCo could be a breakout stock, and investors with an appetite for risk could consider StoneCo as a candidate for a high-growth stock.
