Warren Buffett and his team at Berkshire Hathaway are known for their value approach to investing. So when they choose something a little different, investors should definitely take notice.
Berkshire Hathaway took a position in Brazilian fintech StoneCo (STNE 5.01%) when it went public in 2018. It's down 42% since its initial public offering (IPO) and 80% off its highs.
Did Buffett make a mistake? When he does, he's not hesitant to sell. But Berkshire Hathaway is holding on to it. Is StoneCo stock a buy today?
Not your typical Buffett stock
StoneCo is a young and fast-growing company that provides payment and management solutions for small and medium-size businesses, like Block and PayPal do in the U.S. This is a departure from the standard Buffett company that's blue chip, established, and slower growing.
StoneCo has been posting relatively stable and high growth in revenue over the past three years.
STNE revenue (TTM) data by YCharts; TTM = trailing 12 months.
Management sees huge opportunities and it's refining its mission to offer software, hardware, and services to help micro, small, and medium-size businesses grow.
The development of a wider range of services is generating higher revenue at lower costs, with more customers signing on for more products. For micro businesses -- typically defined as employing fewer than 10 people --StoneCo's simple solutions attract clients who need quick, easy-to-use services at a low price. These also come at a low cost to StoneCo, since they are all-digital and offer little customization.
Its Stone and Lynx products for bigger clients are merchant and payment processing products with higher customization, and they attract businesses that appreciate the wide scope of services available in a complete solution.
StoneCo also has credit and banking products that allow businesses to take care of all their financial needs in one place. As it captures market share, especially among larger businesses, it is expecting total payment volume to have a compound annual growth rate (CAGR) of 13% over the next few years.
Merchant payment customers increased by 42% year over year in the third quarter of 2023, and banking clients more than tripled to 1.9 million.
The road is finally smoothing out
Although StoneCo is reporting rapid revenue increases and strong profits, it has experienced large bumps along its path.
There was major fallout after it experienced regulatory issues that affected its credit product in 2021. StoneCo faced higher-than-expected delinquency rates and it took time to rebuild its credit business and trust with investors.
Partly in reaction to business problems, there has been very high management turnover. That was necessary to redirect the company and get back on track, but it also presents its own volatility. StoneCo went from a high-growth company with a bright outlook to a risky play.
Under new management, the business looks like it's stabilizing. Adjusted net income quadrupled year over year in the fourth quarter, with its margin expanding from 4.3% to 13.9%, and it has reported three consecutive quarters of net income under generally accepted accounting principles (GAAP). Management is expecting adjusted net revenue to have a CAGR of 31% through 2027.
The stock looks like a possible buy for some investors
At the current price, StoneCo stock trades at an incredibly cheap one-year forward price-to-earnings ratio of 12, and a price-to-sales ratio of 2.7.
There's plenty of opportunity for the company, and it's managing through its issues effectively. It has also maintained strong sales growth despite challenges, bolstering the argument that it's a strong industry leader. But it hasn't sustained its progress long enough yet to be considered low risk.
If you have an appetite for risk, you might want to consider taking a small position in StoneCo. If you don't, you might want to keep it on your watch list.
