StoneCo Ltd. : Prices drop as business does well (NASDAQ:STNE)

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Economic model STNE

Economic model STNE (STNE 2020 10k)

StoneCo Ltd. (STNE) is a leading provider of financial technology solutions in Brazil, primarily for small businesses. The stock price crashed recently with an 89% drop from the all-time high. I think STNE had some short-term headwinds. However, the negativity seems exaggerated and the fundamentals of the company are still strong.

Data by YCharts

Products and services

STNE is like a Brazilian version of Square (SQ) that helps customers connect with customers, get paid, and grow. His point of sale (POS) connections, e-commerce gateway and payment service provider platform (NYSEARCA:PSP) enable customers to do business digitally. With growing software offerings, STNE enables small business owners to more effectively manage payments, supply chains, finance and customer relationship. You can find a wide range of tools such as online payment, recurring billing, social commerce, digital banking, reservation, food delivery, health plan, credit reports, accounting, receivables, insurance, etc. All of these products and services are valuable and sticky, especially for small business owners. There’s no reason to have two card readers or create other accounts to run a small store or restaurant. Once they have adopted STNE’s platform, they are very likely to stay with STNE.

The single distribution channel

Acquiring a large network of customers and merchants is essential for STNE. It needs enough merchants to attract consumers and make payments. Larger platforms will then entice more traders to join the platform in return, as people often view larger platforms as having better coverage and security. However, creating a network effect at an early stage is extremely difficult when few people trust and understand your products. To solve this marketing problem, STNE adopts a unique strategy of engagement with its customers called Stone hubs and Stone Agents. With over 350 proprietary sites across Brazil, STNE has hands-on interactions and personalized customer support from its in-house customer team and local Green Angel teams. This approach may have higher capital and labor costs, but it gives STNE a better understanding of customers. Given Brazil’s low level of digital payment literacy, STNE’s face-to-face marketing could build trust and showcase its product more easily. Brazil’s large geographic size also creates logistical challenges such as slow delivery times and slow and inconsistent customer support. STNE’s local presence makes it possible to meet the needs of specific territories and design differentiated solutions.

Additionally, Brazil has more than 5,500 cities with approximately 8.8 million small businesses with gross revenues between R$81,000 and R$78 million. Many smaller cities have a limited local market size that may only allow one payment platform (for better efficiency). Once an STNE hub has been established and the STNE platform in a city has been introduced ahead of competitors, it is highly likely that the majority of merchants will opt for STNE.

Overall activity continues to grow rapidly, although there are short-term headwinds in credit

As the largest independent merchant acquirer in Brazil and the fourth largest by total volume in Brazil, STNE is rapidly growing its customer base and total payment volume (TPV). According to the latest results for the third quarter of 2021 (below), STNE is currently serving more than 1.3 million active MSMB (merchant) customers, which is 2.2 times more than the previous year.

STNE customer growth

STNE customer growth (Presentation STNE 2021 Q3)

Another good sign is STNE’s clear picture of an emerging fintech ecosystem. As the customer base grows, adaptations of other products increase. In the chart below, we see bank accounts, software customer base, omnichannel stores all showing rapid growth. Total annualized revenue for the quarter reached R$5.9 billion. Thanks to the Linx acquisition, software solutions represented approximately 21% (16.7x growth from last quarter).

Business growth

Business growth (Presentation STNE 2021 Q3)

Recently, STNE has shown signs of slowing down. Excluding the Linx acquisition, total revenue increased by only 29.3% to R$1.2 billion. Headwinds include:

1) high cost of financing due to the rise in interest rates;

2) credit product on hold because the management admitted to having made errors in their execution especially without foreseeing the dysfunction of the registry system. They must therefore stop the disbursement of credit and increase the coverage of future losses.

3) Brazil went through the worst COVID crisis in the world in 2021, which affects spending and business activities.

4) greater investment in hiring, development and marketing.

5) 1.4 billion reais from an investment in Banco Inter.

However, all of these challenges are short-term and curable that will not have material damage to business fundamentals. As a young fintech company with big growth plans, STNE has done a good job on customer base, TPV and retention rate which should be the most important metrics to monitor. Moreover, it has been gaining market share since the beginning without any signs of slowing down (as below).

Evolution of STNE's market share

Evolution of STNE market shares (presentation STNE 2021 Q3)

The Brazilian market offers great opportunities

In Brazil, e-commerce sales are expected to grow at a CAGR of 14%. The volume of digital payments is also growing regardless of the macro environment. During Brazil’s recent recession (2014 to 2017), nominal GDP grew at a CAGR of 4.3%, while the volume of digital payments grew at a CAGR of 8.1%. The space for future expansion is huge given that Brazil still has 50% of household consumption that has not been done by cards. Excluding merchant acquiring or payment business, the company also estimated that banking, credit and software could reach a total of R$120 billion TAM.

Total addressable market

Total Addressable Market (2020 10K STNE)

Overall, I think Brazil, as a developing country, is always a tailwind for STNE investors. Brazil’s GDP had been depressed since 2014 following the fall in commodity prices (soya and iron ore, for example). They had this economic contraction for 7 years already. It is impossible for Brazil, as a non-communist country, to decline forever. Future inflationary pressure could drive up commodity prices and provide a tailwind for Brazilian exports. President Bolsonaro’s deregulation policies should also help revive the economy.

STNE is a company that Brazilian society needs because it offers more efficient solutions and creates real value for small businesses. Once he can establish and secure a leading position in the market, he is very unlikely to fail.


Many Brazilian fintech startups have emerged over the past decades. STNE is just one of the names out there. Although STNE is healthy developing its customer base and gaining market share, we do not know if this could change in the next 3 or 4 years. STNE must execute its strategy and deliver better results when the effects of COVID and acquisitions normalize. Investments in Linx propel STNE to leadership position in online retail software. STNE needs to find ways to use Linx to create synergy and strengthen its core payment business. The company’s current priority is to acquire as many customers as possible. However, STNE needs to find its key competency and provide clearer direction on what its gap looks like. At the moment, I have the feeling that the management wants to offer everything to the customers, which can lead to unprofitable investments. Additionally, we also have macro risks from Brazil which will always be a risk there.

Stocks are cheap with negativities already embedded

STNE currently has 308 million shares outstanding, including Class A and B shares. With a stock price of $11.2, the total market capitalization is expected to be $3.4 billion or 17, R$5 billion. Currently, the company has many unprofitable early investments, one-time acquisition costs, credit product error costs and headwinds. Temporary headwinds include costs of 0.1 billion reais for Linx acquisition expenses, -0.18 billion reais of credit product pause and -0.5 billion reais of investment cost in Bank Inter. If we cancel these costs, the current TTM net income of -0.25 billion R$ could be improved to 0.53 billion. Assuming that 0.53 billion reais is our estimated earning capacity, we could obtain a cumulative discounted profit over 10 years of 12.3 billion reais (using a discount rate of 7%, a growth rate of 30% for the first 5 years, then 20% for the second 5 years). If we change the starting revenue to R$0.8 billion (2019 figure), we expect to get R$18.6 billion. Considering the strong customer growth and the huge market space to come, the current STNE would definitely be stronger than in 2019. So these assumptions are very conservative. Depending on the assumptions we put in place, there will be a wide range of estimated returns.

Another good thing is that the present value of equity has reached 14.99 billion reais, which makes the PB ratio only 1.16. STNE’s US counterparts such as Block Inc. (SQ), PayPal Holdings (PYPL) and Visa (V) have a much higher ratio than this (chart below).

Data by YCharts


Overall, STNE is a stock with unlimited caps but high uncertainties. Warren Buffett bought the stock at around 18.44 for 14 million shares (252 million worth) during the fourth quarter of 2018. Given his strong background in the financial sector, STNE certainly has good qualities to buy . Its recent $1 billion purchase of Nu Holdings Ltd (NU) during the fourth quarter of 2021 also indicated optimism among Brazilian businesses as a whole. For STNE, I think the risk is low. Any future positive sentiment could boost the stock price towards the uptrend.

Eleanor C. William