Berkshire Hathaway Chief Executive Officer Warren Buffett has delivered life-changing returns for investors in his company and inspired millions of people around the world to take wealth-building steps. And while the Oracle of Omaha is most famous for being a value investor, Berkshire also owns positions in some growth stocks with explosive potential.
For long-term investors, taking cues from Buffett when it comes to building positions in high-quality growth stocks could have incredible payoffs. With that in mind, read on to see why StoneCo (STNE 5.01%) stock stands out as an excellent buy-and-hold investment right now.
Image source: The Motley Fool.
What StoneCo does -- and why it's down big
StoneCo is a Brazilian fintech company that provides payment-processing and other services to small-and-medium-sized businesses (SMBs). If an SMB wants to take payments from a card or through an app, it needs to have capable hardware and a processing network.
With more than 217 million people, Brazil is Latin America's most populous country and largest economy. Compared to many other parts of the world, adoption of card-and-app-based payments is still at a relatively early stage. But it's growing rapidly and looks poised for dramatic expansion as the use of cash declines in favor of payments technologies and e-commerce continues to become more popular.
The very favorable long-term growth outlook for payment-processing services in the Brazilian market was almost certainly one of the key reasons Berkshire Hathaway bought StoneCo stock back in 2018. Buffett's company may also have seen big promise in the fintech credit business, which extended loans to SMBs.
Unfortunately, while the payment-processing business has grown at an incredible clip, StoneCo's credit business has dragged down the company's performance over the past few years. The fintech player had been relying on Brazil's national registry to determine whether applicants were sturdy enough to be creditworthy, and this system proved to have major shortcomings.
As a result, StoneCo ended up with tons of bad loans in its credit portfolio. The company took huge losses as it sold off troubled loans at basement-level prices and wrote off many loans entirely. It also temporarily stopped extending new credit to SMBs.
That all sounds pretty grim, and it helps explain why the company's share price is down 82% from the high that it reached in February 2021. But StoneCo's payment-processing business never stopped serving up encouraging growth, and the company has resolved the previous issues and losses from its credit business.
With past baggage now sorted, this Buffett-backed growth stock looks poised to deliver fantastic returns.
StoneCo's comeback is an incredible opportunity
Through the first three quarters of 2023, StoneCo's sales rose 28% to hit roughly 8.8 billion Brazilian reals -- approximately $1.8 billion. Meanwhile, non-GAAP (adjusted) earnings -- meaning not in accordance with generally accepted accounting principles -- skyrocketed 381% to reach 993.7 million reals, or about $204 million.
While part of the company's explosive earnings growth stems from the comparison with its depressed profits in 2022, StoneCo's momentum is undeniable and looks poised to continue. From 2024 through 2027, the company expects that it will increase adjusted earnings at a compound annual growth rate of 31%.
STNE PE Ratio (Forward) data by YCharts
StoneCo is now trading at 14 times expected profit for 2024, a level that looks very cheap given the company's earnings growth. With a market capitalization of roughly $5.4 billion and a net cash position of about $890 million, the fintech player is trading at incredibly attractive levels for long-term investors.
If the company even comes close to hitting its earnings projections, investors who buy the stock at today's prices will likely enjoy incredible returns.
