StoneCo Ltd. (STNE) provides financial technology solutions. It caters to merchants and partners that conduct electronic commerce across in-store, online, and mobile channels. The company is focused on serving primarily small-and-medium-sized businesses in Brazil, was founded in 2000, and is headquartered in George Town, Cayman Islands.
I am bearish on STNE stock. There are concerns about the profitability and financial health, and its annual sales growth has been declining too.
3Q21 Earnings
Shares of StoneCo have 1-year losses of approximately 78% and only about 14% in 2022. What caused this selloff in 2021? I will cover my arguments in the fundamental analysis section but first, let’s have a look at the latest financial results.
STNE stock earnings as of Q4 2020 have lost their momentum.
Year-over-year for the 3Q21 ended on September 30, 2021 (in Brazilian real currency), StoneCo reported a total payment volume (TPV) of 75.0 billion, an increase of 7.6%. It also showed an increase of 111.8% in Total Active Payment Clients, but a decline of 53.0% for adjusted net income and a decline of 53.7% for adjusted diluted EPS.
Net income for the period (in Brazilian real currency) was (1,260.2 million), a decline of 85.7% compared to 249.1 million in 3Q20.
It is notable that in FY 2018-2020 the company was profitable. This huge net loss in 3Q21 turned StoneCo unprofitable for the first nine months of 2021.
What about the fundamentals of the stock? They can explain my bearish thesis and shed light on why the stock had a tough 2021.
Fundamentals – Risks
StoneCo Ltd keeps issuing new debt, as, during the past 3 years, it issued BRL 1.2 billion of debt. The stock has a Piotroski F-Score of 2, which is low and usually implies poor business operations.
At the same time, the Altman Z-score of 1.62 is not good, signaling that the company is in a distress zone.
Profitability is an area of weak performance for StoneCo. Compared to the IT Services industry return, STNE stock has a return on assets of -0.63%. The industry average return on assets is 0.81%.
STNE’s Return on Equity of 8.34% is worse than that of the rest of the industry. The industry average Return on Equity is 16.95%.
STNE stock has a profit margin of -6.36%. This is below the industry average of 2.11%.
The company had been witnessing very strong growth in annual revenue for 2017 and 2018, but in 2019 and 2020 there has been a notable slowdown. On a quarterly basis in 2021, there has been a rebound of revenue growth to 15.77% and 59.51% for Q2 and Q3 respectively, whereas Q1 growth of -1.24% was very poor.
In terms of financial health, the D/E ratio of 0.30 per latest quarter does not seem excessive.
Investors should note that growth itself should always be examined with other key financial metrics to avoid investing in overvalued stocks. The earnings per share for STNE stock have decreased strongly by -78.75% in the last year.
What are the valuation insights for STNE stock?
Valuation
STNE good seems attractive, based on its PB Ratio (2.04x), when compared to the US IT industry average (5.75x).
However, compared to the Information Technology sector, the stock has a P/E GAAP (FWD) ratio of 71.58, much higher than the sector median value of 29.79. The Price/Sales (FWD) ratio of STNE stock is 6.13, also higher than the sector median figure of 3.95.
Wall Street’s Take
Stoneco has a Hold consensus based on two Buys, four Holds, and two Sell ratings. The average Stoneco price target of $29.00 represents a 74.5% upside potential.
Conclusion
StoneCo has turned unprofitable in the first nine months of 2021, and its profitability has been getting worse in 2019 and 2020. Its business model is having issues, as the latest financial results were very poor.
Furthermore, its earnings could continue to be very volatile, taking into account currency exchange risks related to Brazilian real and specific macroeconomic factors of Brazil.
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