StoneCo Looks Strong As It Recaptures Much Of Its Business From March
Summary
- StoneCo surprises the market with a solid earnings report even with the impact of COVID-19 on its business.
- Operating in the trending payments growth segment, the company should continue to enjoy solid growth for several years.
- Analysts sees the company significantly improving earnings per share in 2021 and 2022.
source: investors.com
Operating in the rapidly growing payment segment, StoneCo (NASDAQ:STNE) produced a surprisingly decent quarter in light of the impact from COVID-19 on the performance of the company in the second half of March.
The company, which is similar to Square, rapidly regained 87 percent of its e-commerce volume in April and May, confirming the strength of the payment sector, and the company's market-leading position in the Brazilian market.
In this article we'll look at the prospects of the company for the next couple of years, and why its growth trajectory should be sustainable for a number of years.
Latest earnings
In the first quarter StoneCo boosted revenue to $135 million, up 34 percent. Adjusted net income dropped 13 percent to $30.5 million as a result of investing in a new business line. Free cash flow jumped to $47.1 million, far above the negative $68.2 million year-over-year.
Management said its second quarter adjusted pretax margin will be in a range of 20 percent to 24 percent, against the 32.6 percent in the first quarter.
What was impressive in the reporting period was how well the company rebounded with its total payment volume (TPV) after the weak last couple of weeks of March.
Up until March 15 the company had enjoyed 52 percent growth in TPV. In the last couple of weeks in March it dropped by 4 percent. In April it started to reverse direction, increasing TPV by 9 percent, and in May it had rebounded by 23 percent by the third week of the month. Even with the temporary headwinds, it looks like StoneCo is going to have a solid second quarter.
As for TPV growth measured against Q1 of 2019, it was up 42 percent to $7.08 billion near the end of May, based upon exchange rates at the time.
Another positive for the company was it increased its customer base, adding 50,500 new clients in the quarter, finishing the quarter with 531,300. This didn't include its TON business that was launched in March, which quickly attracted 23,200 active customers.
Management claims the company accounted for 51 percent of all e-commerce transactions in Brazil in the first quarter. Susquehanna analyst James Friedman wrote in a note that e-commerce volume in the current quarter could be growing close to 80 percent year-over-year. He added that "A combination of their quick pivot to enabling e-commerce for their merchants - coupled with a footprint in less affected regions - is enabling a faster than expected recovery."
Strong cash position
Taking into account the challenges faced in the first quarter, the next couple of years look good for StoneCo, with the payments sector continuing to be in a powerful secular trend.
Good news on that front is the company increased its cash net of debt and credit liabilities, to $950 million at the end of the first quarter; that's up from the $940 million it had a year ago.
With ongoing disruptions it's most likely growth for the remainder of 2020 will be slower than in the recent past. Yet with a strong cash position and momentum remaining on its side, the company will be a solid performer for patient investors. It's only going to get better for shareholders because it has plenty of available capital to cover slow periods and fund its growth.
One area of potential risk
With its credit service, StoneCo could have it offset some of its other gains if it underperforms.
Brazil's economy has weakened even more than it was before the impact of COVID-19 came about, and with businesses under more pressure than before, it could result in a rising number of loan defaults.
To mitigate the risk, management says it has stayed away from parts of the economy that have a higher risk of loans not being paid by weaker businesses.
Other measures in place are the company deducting loan payments from customer sales, along with a robust vetting platform in place to eliminate credit-challenged firms.
Once again, this business struggled more in March, with only 83 percent of expected loan revenue being collected. On a per-month basis through April, the company was generating a monthly return on assets of 2.7 percent.
It appears the company is managing its credit business well, but it's worth keeping an eye on to see if it worsens going forward, as that could cut into its other healthy business growth segments.
Investors should keep in mind that Brazil is second only to the U.S. in the number of COVID-19 cases.
Conclusion
StoneCo operates in a business segment that is in a long-term upward secular growth trend. It has proven its resiliency after a difficult last couple weeks in March, rapidly rebounding and returning to a respectable growth trajectory.
Its lack of exposure to the worst parts of Brazil as it relates to the pandemic, along with its increasing market share in the payments industry, point to a high percentage likelihood the company is going to do very well over the next two to three years.
While its earnings were disappointing, the outlook beyond 2020 looks good.Since it has already captured 87 percent of the e-commerce business it was generating before the pandemic, it's not hard to see the company running on all cylinders in the months and years ahead, with the caveat it doesn't take a big hit from the pandemic if it gets worse before it gets better.
But even in that worst-case scenario, it would only slow down its progress, rather than cause losses that would be difficult or impossible to recoup.
The company may take a temporary breather, but as StoneCo stands today, it should be a solid holding for shareholders for a prolonged period of time.
This article was written by
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