Why Has StoneCo Stock Been Going Down?

Fintech company StoneCo Ltd. (NASDAQ:STNE) is no ordinary Brazilian firm. It delivered such impressive performance that it even attracted the attention of Warren Buffett’s Berkshire Hathaway.

With its comprehensive suite of financial technology solutions aimed at small-to-medium sized businesses in Brazil, StoneCo grew rapidly over the past five years. 

It clearly solved a pain point in the market with its point-of-sale hardware and software solutions as well as its credit services and payment processing combination. By helping SMBs to simplify their financial operations, StoneCo was adopted quickly and widely.

But in recent months the share price has been on the decline leading to concerns that the company’s heyday is in the rearview mirror. Are the worries justified? 

Is The StoneCo Growth Story Ending?

Why has StoneCo stock been going down? Slower top line growth and profitability flipping negative have been the primary culprits leading to StoneCo stock falling.

Since its 2018 IPO, StoneCo has managed to grow its top line each and every year. That year it went public it reported revenues of R$1.58 billion ($310.43 million) reflecting a growth rate of 63.1% to year-over-year.

The following year, that figure had risen to R$2.58 billion ($506.38 million) and by 2020, a further 28.9% was reported to R$3.32 billion ($652.59 million).

The pandemic years didn’t slow down the momentum much with further 45.3% and 98.8% gains to R$4.82 billion ($948.24 million) and R$9.59 billion ($1.89 billion) in 2021 and 2022, respectively.

Last year, the company’s top line of R$12.06 billion ($2.37 billion) represented 25.7% annual growth. The CAGR of 53.1% over the past three years and 49.4% over the past five years is a clear indicator that StoneCo has been on fire and it’s no surprise when viewing total payment volumes.

In 2018 they clocked in at R$83.40 billion ($16.39 billion) and rose to R$129.10 billion ($25.38 billion) in 2019 and further to R$209.90 billion ($41.26 billion) in 2020.

Since 2021, StoneCo’s TPV was re-defined and considers all volumes settled by the company. In 2021, TPV stood at R$275.40 billion ($54.14 billion), up 33.4% and then a further gain to R$367.40 billion ($72.22 billion) in 2022 and again by 11.2% to R$408.30 billion ($80.26 billion) last year.

It’s clear that the monumental growth has stalled somewhat and this is largely attributable to a lag in its key accounts segment.

Profitability Hurdles Plaguing Financials

While revenue growth has been impressive, the same cannot be said about its profitability.

The company broke into positive (GAAP-based) net income in 2018, posting R$305.23 million ($60 million).

The following year, in 2019, net income more than doubled to R$804.20 million ($158.09 million) and improved further to R$837.45 million ($164.62 million) in 2020.

However, problems struck in 2021. Brazil’s economic recovery was not especially strong, and at the tail-end of the year, the country’s economy was pushed into a recession due to high inflation and interest rates, alongside harsh weather conditions.

There was another factor in play that was affecting StoneCo’s credit operations in that year. A new registry of receivables was implemented in Brazil to improve efficiency but this led to a temporary stop in credit disbursement and a downward adjustment of estimates on the potential recovery rate from non-performing clients.

This was reflected in net income, which turned into a whopping loss of R$1.38 billion ($270.75 million) for the year. The company cited macro problems as a part of this profitability drop but also stated its aggressive commercial approach as another primary cause.

The good news for the company remains the fact that its recovery from that low point has been quite good. In the subsequent year, the net loss reduced to R$526.40 million ($103.48 million) and last year, it turned again into an income of R$1.60 billion ($314.60 million), which is higher than any of the preceding years.

Fiscal 2022 was a pivotal year for StoneCo, when it evolved its commercial strategy in the MSMB (micro and SMB) unit and tried to optimize its Ton and Stone brands.

In 2023, this MSMB-focused strategy was carried forward, and paid off in spades as the company was better able to recognize conversions of TPV into deposits.

Is It Time To Buy StoneCo Stock Now?

The growth in StoneCo’s financials underscore the potential of the stock. Beyond the profit-and-loss statement, the company has ample cash (R$5.05 billion or $993.36 million in adjusted net cash as of 2023 year-end), which can position it for further expansion.

Management and analysts expect high growth going forward, which is demonstrated by its mid to long-term outlook. In 2024, its MSMB TPV is expected to grow by 18%, and a CAGR of 13% is expected between 2024 and 2027. Adjusted net income is expected to exhibit a CAGR of 31% over the same period.

The company’s stock has declined more than 80% since 2021 and so its valuation is quite reasonable at the moment. Its price sits at a meager 1.99 times forward sales. Furthermore, Wall Street analysts see a 17.4% upside in STNE.

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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.