Brazilian fintech company StoneCo (NASDAQ:STNE) has been on a tear in recent weeks, with its share prices rising 12% in the past month alone.
The company, which provides payment and financial management solutions to businesses, is among the most potentially exciting financial technology firms powering the modernization of the Brazilian economy.
We take a look at why StoneCo stock went up so much and whether the company could still be a good buy for investors.
Why Did StoneCo Stock Go Up So Much?
StoneCo’s strong recent returns were mostly the result of the Q4 earnings report, which came in stronger than investors had previously expected.
Management reported revenue growth of 11% and adjusted EPS growth of 47% compared to the previous year. The EPS results were particularly important when it came to driving share prices up because analysts had expected $0.06 per share and the company delivered $0.40.
It’s worth noting, though, that Q4 was a single quarter of very positive results that came after quite a long slowdown in top line sales. Prior to Q4, year-over-year revenue growth had declined for five consecutive quarters and even gone negative in Q3. Net income growth had also been slowing, falling from over 50% in Q2 to just 15.5% in Q3.
Over the coming few years, analysts forecast that StoneCo earnings will climb at a rate of over 20% annually. If management can hit such a high rate of growth, expect current share prices to sit well in the rearview mirror.
Brazil Country Risks Loom Large
One of the largest risks StoneCo faces in the short term is the situation in Brazil itself. In February, Brazil cut its GDP growth outlook for 2025 to just 2.3% while also raising inflation projections. With lower growth and higher input costs, businesses are apparently becoming more skeptical of adopting new tools at this time.
With that said, Brazil’s long-term future is likely to be significantly brighter. The country is rapidly modernizing financially, as evidenced by the success of fellow Brazilian fintech major Nu Holdings. With Brazil becoming a more integrated and digital economy, StoneCo’s services will likely be in increasing demand among merchants.
Speaking of Nu Holdings, it’s possible that the larger, more dominant fintech company could reduce StoneCo’s market opportunity. Although the two don’t compete much with each other right now due to StoneCo’s focus on businesses and Nu’s focus on consumers, that may not be the case indefinitely. Nu already offers payment processing services for businesses, and its greater scale may very well enable it to expand its commercial offerings quickly.
A final risk to be aware of is that StoneCo’s growth could be affected by rising Brazilian interest rates. In order to reduce its inflation, Brazil has steadily increased its interest rates. The rate projection for this year was recently increased to 15%, a level that could severely affect the small businesses that form much of StoneCo’s customer base. If interest rates remain elevated for a long time or are forced higher by ongoing inflation, Brazilian fintech companies in general could be in for a difficult time.
StoneCo’s Valuation Is Compelling
One of the most striking things about StoneCo shares right now is how low their value multiples are compared to other fintech stocks. At the moment, STNE is trading at just 8.0 times earnings, 1.4 times sales and 1.6 times book value. Coming off of the better-than-expected quarterly earnings, there’s a decent initial case to be made that the stock could be undervalued.
Analysts’ price forecasts for STNE also remain quite positive. The average target price for the stock right now is $13.34, which is around 20% above the most recent close of $11.10. It’s worth noting, however, that the range of target prices is quite broad, running from as low as $6 to a high of nearly $20.
The fact that revenue and net incomes had been falling for some time before Q4, however, raises some real questions about whether StoneCo could be something of a value trap.
Despite low multiples and projected upside, StoneCo’s slowing growth over long periods of time could be getting ignored due to the rather positive Q4 earnings report. As such, the stock could move lower if StoneCo fails to follow its recent results up with sustained growth.
It’s also useful to note that even Q4’s results haven’t allowed STNE to regain much of the ground they lost in the past year as a result of declining growth. On a 12-month basis, StoneCo shares are still down more than 33%. Given the general difficulties of the stock market right now, it’s possible that the downward pressures on STNE could overpower the upward pressures generated by its earnings report.
Is StoneCo a Buy Now?
Although StoneCo had an exceptional fourth quarter, there are still some fairly large worries associated with the business. To begin with, weaker economic conditions in Brazil are likely to stunt StoneCo’s growth, potentially causing it to give up some of the gains it produced coming off of its Q4 earnings report.
Speaking of that report, a single quarter of much-improved performance may not quite be enough to get investors off the bench after a prolonged period of declining growth.
Ultimately, if StoneCo Q4 proves to be a short-lived blip in the trend of lower growth, though, there’s a chance that STNE could stagnate or even fall again. As such, investors may want to watch the business for a while to see how it fares before considering adding it to their portfolios.
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.
