StoneCo, the Brazilian e-commerce provider had a poor run in 2021, with news that its fourth-quarter earnings report had been delayed sending its share price to historic lows. However, bullish guidance from the firm’s management was received well by investors, and its stock rallied by over 30% in less than 24 hours.
But the about-turn in StoneCo’s fortunes might not have come as such a surprise to everyone. One high-profile investment figure who’s bought STNE stock in the past is Berkshire Hathaway’s Warren Buffett.
The Oracle of Omaha opened a position in the Cayman Islands-based company in 2018 with a purchase of 14.2 million shares at an average closing price of $23.13. The stock did well to begin with, rising to a high of over $92 in February 2021, just a little more than a year after its IPO.
However, the company’s price has been falling pretty much ever since – although Berkshire did cash in 3 million of its shares in Q1 2021, right around the same time it hit its not-since-seen lofty heights.
Why Did Buffett Buy STNE?
No doubt one of the most important reasons for Buffett’s decision to buy StoneCo was the opportunity the company had in a fast moving, high-growth market like Brazil. The e-commerce space in the region grew by 18% in 2021, with STNE estimating that the total addressable market for its credit, banking and software businesses in the country could reach $120 billion reais – or US$24 billion.
Moreover, STNE has an interesting distribution model that appears to give it a competitive edge over its peers. The company is in many ways a kind of fintech company in the mold of Block, Inc. – formerly Square – in that it offers a way for customers to connect with merchants and sellers, facilitating transactions between the two while delivering a raft of other point-of-sale services as well.
However, to do this efficiently, StoneCo needs to build up a large base of users in order to benefit from the network effects that come with scale. It goes about this using what it calls its Stone hubs and Stone Agents, which are physical locations where StoneCo representatives can offer an in-person service, advising potential clients on how best to get the most out of its products.
There are more than 350 of these locations within Brazil, which helps drive the firm’s marketing efforts in a geographically large country that also suffers from low digital literacy. The hands-on approach ensures STNE can offer consistent customer support and differentiated solutions for a nation with diverse local cultures.
Source: Unsplash
StoneCo’s Business
Another factor underpinning Berkshire’s optimism in StoneCo will be the granular details contained in the company’s guidance that first sent its stock skyrocketing in late Q1 2022.
STNE’s upbeat revenue forecast predicts that, for the first-quarter of fiscal 2022, its top line will fall somewhere in the range of $1.85 billion to $1.90 billion Brazilian reais – much higher than the average $1.7 billion that most analysts expected.
This would represent a 119% year-on-year revenue growth, with its total portfolio value also expected to rise 83% to a figure of $60 billion reais as well.
Furthermore, on its latest earnings call, StoneCo’s CEO Thiago Piau outlined plans for an ambitious restructuring of the company too.
The firm expects to bring in “seasoned and talented” staff to bolster and strengthen its leadership team, while it also intends to reorganize the structure of the business, separating it into two segments i.e. software and financial services.
This will mean that, going forward, the financial services wing – the payments processing section of the operation – will have its own management team.
Indeed, this aspect of the business accounts for 73% of STNE’s revenue – and with an active payments client base of 1.8 million that’s grown 130% year-on-year, the renewed focus here can’t come soon enough.
Is STNE Cheap?
StoneCo’s share price action over the last couple of years has been, to put it mildly, abysmal. The company’s stock fell from an all-time high of $94 in February 2021, to a record low of only $8 in early Q1 2022.
Many investors might be put off by a business that’s suffered such a precipitous drop, but its recent price realignment makes it a potentially attractive value play at the moment. In fact, there’s little doubt that that’s what’s keeping Buffett’s interest in the stock afloat, and why analysts are eyeing the firm as a buy right now.
Just how much of a discount investors are getting with the company at its present valuation seems to be the key question here.
StoneCo only went public toward the end of 2018, and its share price is currently trading just a few dollars off of its all-time low. However, the business is healthy: STNE added a record net 367,300 micro, small and medium business (MSMB) client additions in the fourth-quarter, while increasing its MSMB total payment volume by 87% year-on-year.
In addition, StoneCo’s management believes its margins are also expected to improve throughout 2022. This is pretty significant, not least because its profitability stats aren’t too bad at the present time either – its TTM levered free cash flow margin currently stands at a huge 104%, while its EBITDA margin is a very respectable 31% too. The company’s forward price-to-sales multiple is also good at an IT sector beating 2.61x.
Is StoneCo A Buy?
Warren Buffett was once notoriously shy when it came to buying technology stocks, famously claiming that he didn’t invest in companies he didn’t understand.
But that’s certainly no longer the case, with the famed investor relenting with the admission that he should have bought Alphabet – the parent company of Google – much earlier when he had the chance.
So why, ultimately, did Berkshire take a 4.05% stake in StoneCo’s company, giving it a portfolio weighting of 0.05% with 10.7 million shares on its books? Well, the business is sticky, which is something Buffett seems to like. Once STNE has a customer or a client, they’re likely to remain – giving the firm a massive opportunity to cross-sell more products and services, and grow the revenue it receives from each merchant and user.
From his initial purchase in 2018, Warren Buffett is down about 40% on his investment in STNE. No-one is hoping more than he that the resurgent fintech eventually comes good. The good news for all investors is that there’s signs the business has turned the corner – and, at its present low price, it’s surely there for the taking.
#1 Stock For The Next 7 Days
When Financhill publishes its #1 stock, listen up. After all, the #1 stock is the cream of the crop, even when markets crash.
Financhill just revealed its top stock for investors right now... so there's no better time to claim your slice of the pie.
See The #1 Stock Now >>The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.