Why Did Buffett Buy StoneCo?

Why Did Buffett Buy StoneCo? As Warren Buffett approaches his 92nd birthday, he shows no signs of slowing down. He is still very much in charge of his holding company, Berkshire Hathaway, and he is still delivering impressive returns despite the complexities of the current market.

Warren Buffett’s strategy is simple. He invests in companies with strong long-term prospects, but he won’t overpay – he focuses on stocks that are a good value. More importantly, he has the discipline and patience to hold the best stocks indefinitely.

For example, Buffett started buying Coca-Cola stock in 1988 and still holds those shares today. Between the growth in stock price and regular dividends, his initial investment in Coca-Cola has returned roughly 5,810 percent. Moves like this have made Warren Buffett one of the most successful investors of all time.

When Did Warren Buffett Invest In StoneCo?

Buffett has an uncanny ability to predict which companies are most likely to reward shareholders, so his trades are closely followed by financial analysts and market experts. When Buffett sells, other shareholders follow. The impact of his trades is amplified as others attempt to duplicate them.

Buffett’s decision to buy a sizable stake in the Brazilian fintech firm StoneCo (STNE) is a prime example of the Buffett Effect. During the company’s October 2018 IPO, Berkshire Hathaway bought 14 million shares, and Berkshire Hathaway owns nearly 10.7 million shares of StoneCo today.

In the first two days of public trading, StoneCo share prices increased by 30 percent. In the three years following Berkshire Hathaway’s investment, the stock tripled in value. It peaked at more than $92 per share in February 2021 before experiencing a slow decline.

As of late August 2022, the stock has dropped almost 70 percent in value since it began trading publicly. It is down more than 50 percent year-to-date.

Nonetheless, Buffett hasn’t sold off all of Berkshire Hathaway’s stake in StoneCo, though he closed out several other positions during the second quarter of 2022. Buffett clearly believes in StoneCo’s ability to deliver returns over time, which suggests that StoneCo stock is a buy.

Why Did StoneCo Stock Go Down?

Latin American countries have a long history of conducting most transactions in cash, and Brazil is no exception. However, digital payments are becoming popular as more consumers gain internet access through mobile devices.

StoneCo is one of a handful of Latin American companies that offers secure cashless transactions in Central and South America, and it is gaining market share rapidly.

StoneCo had less than 450,000 customers as of the third quarter of 2019. That figure increased to more than 1.7 million by the end of 2021. However, StoneCo fell victim to the broad selloff of tech stocks in 2022, when investors moved from riskier growth companies to safer, more reliable assets.

StoneCo saw another sharp drop in its stock price after reporting its second-quarter 2022 earnings, even though most results were positive. Shareholders appeared concerned with the fact that StoneCo didn’t meet the consensus estimate for adjusted earnings, coupled with the news that StoneCo’s Chief Financial Officer is leaving the company.

Does that mean StoneCo stock is not a buy?

Will StoneCo Stock Recover?

StoneCo might have missed the mark on adjusted earnings per share, but it made impressive progress in the areas that matter. StoneCo CEO Thiago Piau said:

Our business is performing very well. We are winning new clients faster than last quarter and are producing strong revenue growth while improving profitability.

Specifically, second-quarter revenue came in at around $442 million, which is 4.7 percent higher than the high end of guidance shared in previous quarters. That figure represents a year-over-year increase of 275 percent.

Though adjusted earnings per share didn’t hit analysts’ projected $0.11 per share, adjusted earnings per share did grow. The company realized a loss during the second quarter of 2021, so $0.05 earnings per share is a step in the right direction.

Meanwhile, total payment volume (TPV) is on its way up. For second quarter 2022, that figure came in at approximately $17.8 billion. In terms of metrics that matter, TPV is at the top of the list. Higher volume means more customers are using the platform, and the value of payments sent through StoneCo’s platform is going up.

That’s important because StoneCo makes its money by taking a small percentage of every transaction. TPV growth necessarily means revenue growth.

In other words, there is every reason to believe that StoneCo stock will recover. Its advanced technology is some of the most innovative in the business, and StoneCo is right in the center of an emerging market.

As internet access continues to expand in Latin America, StoneCo is well-positioned to attract and retain consumers and merchants who are transitioning into a more digital lifestyle. That makes StoneCo stock a buy.

StoneCo Stock Forecast

Running the cash flow forecasts on StoneCo, the upside opportunity is really enormous. We see intrinsic value sitting at $14.91 per share, representing as much as 49.2% gain from current levels at the time of research.

The relative value is highly attractive while price momentum has been highly negative. Growth stands out as A+. Top line growth over the past five years has been:

• 2017: 75.2%
• 2018: 106.3%
• 2019: 56.2%
• 2020: 32.5%
• 2021: 85.8%

Profits and cash flows are the blots on the ointment but if you’re a value buyer like Buffett, holding StoneCo now makes for a compelling reward to risk ratio. The margin of safety is wide with such significant upside.

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