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StoneCo: Margins Face Headwinds, But Core Growth Continues

Dec. 03, 2021 9:08 AM ETStoneCo Ltd. (STNE)26 Comments


  • The market clearly wasn't impressed with 2021Q3 earnings as StoneCo favoured client relationships rather than immediately passing on recent interest rate hikes to their product pricing.
  • Funding costs increased 252%. Management also cited heavy investments in growth as reasons for why margins are well below historical levels, and expected to remain so in the near-term.
  • Whereas Q2 benefitted from a mark-to-market gain on StoneCo's Banco Inter investment, this swung to a large loss in Q3. There are probably more mark-to-market losses, to come.
  • Accounting for the Linx acquisition and inflation, growth is not quite as torrid as would first appear. Proforma, nominal revenue growth was only 26.4%, but 46.4% ex-credit.
  • In my view, the pullback helps to offset the risks, resulting in an improved opportunity for long-term investors. I discuss some key risk factors.

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Investment Thesis

StoneCo Ltd. (NASDAQ:STNE) has seen a further sharp stock price pullback after 2021Q3 earnings revealed additional issues. These include reduced margins as StoneCo slowly adjusts product pricing to Brazil's rising interest rates, mark-to-market losses

This article was written by

I write about value/GARP stocks, and have been investing in stocks since around 2015 -- prior to that, I held index and mutual funds. I'm a lapsed economist based in Canada with 10+ years work experience, hold an MA in economics, and an undergraduate degree spanning economics, geography, and comp sci. My interest in stock investing came about by seeing it as a personal/intellectual challenge (and an opportunity for improved financial returns ;) -- it also defies dogmatic theories about the world. Some books that I've found worthwhile include Beating the Street (Peter Lynch), Superforecasting (Tetlock and Gardner), Buffett (Roger Lowenstein), and Common Stocks and Uncommon Profits (Philip A. Fisher), among others. Usually I lean towards value-oriented stocks, although I aim to be open-minded and opportunistic.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of STNE, PAGS, MELI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I'm not a financial adviser/advisor, and this article is only intended to express my own perspective. I could have overlooked key facts and/or risks, and my views could change at any time, not least because of new information that might become available. The suitability of an investment depends on your own personal circumstances and risk tolerance. You are responsible for your own due diligence and investment decisions.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (26)

Northern Reflections on Value profile picture
Sounds like they're dusting themselves off, with the 2021Q4 results/guidance, today...
Northern Reflections on Value profile picture
I would upgrade this to “strong buy”, if I had time to write an article. It’s already been a couple of quarters pointing to improved fundamental performance, ahead.

Brazil stocks got slammed based on Brazil inflation/macro fears. Now they’ve gotten slammed again, based on North American inflation/macro fears, apparently. This seems like a double penalty, and somewhat excessive.

As always, caveat emptor. There are, of course, other beaten down Brazilian tech stocks, to “diversify” with.
Northern Reflections on Value profile picture
FWIW, StoneCo has denied the report that they're looking at strategic alternatives:

@Northern Reflections on Value Funny how the stock isn't down after hours on that news... The "efficient market" in action lol
Northern Reflections on Value profile picture
@Mitthrawnuruodo It's probably customary for companies to deny rumours like this, whether true or not.

If true, I'd have a hard time seeing how looking for strategic alternatives would be a positive, for any investors that are long-term minded... either (1) business performance has deteriorated further (and rapidly) in just 5 weeks since the last earnings call, (2) they've received takeover offer(s) that they're considering, at all-time lows... or (3) they want to try to take themselves private. Any of these wouldn't leave much upside for anyone that bought before November.

Note that the founders control 64% of the votes, so they shouldn't feel pressured to sell unless things are going worse than it seemed.
Northern Reflections on Value profile picture
(having said all of that, I'd go with the rumour not being true. Seems likely the stock will give back yesterday's gain, in the near-term... )
Charles Ian Tan profile picture
Has the management ever indicated vision to grow behind the forests of Amazon? Or is the TAM purely constrained to within Brazil? Serious question from a new investor.
Northern Reflections on Value profile picture
@Charles Ian Tan I didn’t notice a mention of it, in the last few earnings calls/presentations. Sounds like they see a fair number of growth avenues, already, in Brazil.

It’s something I can ask IR, although they could be slow to respond. Seems like it would be a logical thing to do, when the time is right, but would also require additional capital investment. Might depend on where they see the best return on investment.
Northern Reflections on Value profile picture
@Charles Ian Tan To follow-up on this, they don’t have near-term plans to expand beyond Brazil, e.g. in the next ~1-3 years. They’re more intent on being a one-stop shop for Brazilian merchants, for now.

In the medium-to-long-term, though, expanding internationally is something that they’re keen on doing…
Charles Ian Tan profile picture
@Northern Reflections on Value hey thanks for the reply. I appreciate this.

A little disappointed as I thought perhaps a market share grabbing (outside of Brazil) by sacrificing cashflow ala SE or MELI may be the way to go too.
I brought my cost average down to 26.2 from 44 usd. Position got larger than I would like but I have confidence it will pay off long term. Do you think 26.2 is a good value for this stock long term? Are we still talking a potential multibagger opportunity from that price?
Northern Reflections on Value profile picture
@Julianalessio Sorry, I missed this comment.

I don’t have a crystal ball, obviously, but it would probably take a lot longer from 26 — a lot would have to happen to get back to previous highs! But to me, the risk-reward trade-off looks reasonably good, for the long-term, for the reasons I discussed in the article.

Could still go lower, in the near-term.
Great article, thanks for writing about the stock. I do have a question though, relating to your graph showing that the forward PE is 90, which seems really high. For instance, Morgan Stanley has a price target of $67, implying that "the shares would be trading at 62x '22e P/E". This means they're expecting about $1.08 in EPS next year and it would now be trading at about a 15 PE. Your other graph also shows 4.56 in EPS consensus for 2022, and I'm assuming this is in Brazilian Real and about $0.81. This would make the forward PE higher than 15, but still only 19 or so. Why is the forward PE number so high at 90? Thanks.
Northern Reflections on Value profile picture
@Mitthrawnuruodo Thanks for reading, and for picking up on that. The forward P/E shown there is for 2021 -- forward P/Es for 2022 and 2023 look to be around ~22x and ~14x, respectively, by current estimates.

Yeah, the consensus EPS numbers in the chart are way off, but your explanation that they could be in Brazilian reals looks about right. I've noticed, also, that that consensus EPS chart is a few days old, and there was some further downward revision since then, particularly for 2021 ($0.25 to $0.18).
@Northern Reflections on Value Thanks for the response. I'm down quite a bit and I'm surprised it dropped so low... I think as long as those 2022 and 2023 numbers turn out as expected, we should be okay ^^
Northern Reflections on Value profile picture
Note that I've seen a couple of articles point to regulatory changes in Brazil as having been a recent problem.

At least in terms of the credit problems and Brazil's registry of receivables, the main issue has been technical/operational problems with the registry, rather than the change in the regulatory framework, per se.

TKS for the article, well done. Brazil is a basket case and all of my FinTechs are being hammered. I just bought some more, today. Does anyone have a helping hand to pick up my fingers? Catching this falling knife has been a bloody mess!
Northern Reflections on Value profile picture
@SelmaPete Thanks for reading. Probably most helping hands nearby have lost a few of their own fingers, as well!
Midas2000 profile picture
Does Warren still own it?
Northern Reflections on Value profile picture
@Peter Allan Childs As of Q3, Berkshire still owned it, but they had cut back, previous to that.


This is something like 0.24% of their portfolio, but around ~3.5% of STNE's market cap. So it's a small company for Berkshire. It will be interesting to see if BRK made any change, in Q4.
Northern Reflections on Value profile picture
@Peter Allan Childs It looks like BRK last trimmed 25% of their position in 2021Q1, when STNE would have been in the $59-$95 range.
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