Despite the bearish momentum around the share price following the release of Q1 earnings, Brazilian payment services provider StoneCo (NASDAQ:STNE) remains one of the most attractively valued companies in the industry, considering its future earnings potential. This is the key reason why I’m bullish on STNE.
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StoneCo recently disappointed the market by failing to beat earnings and revenue estimates, reporting EPS in line with Wall Street forecasts but revenues below the consensus, resulting in a sell-off of more than 10% since it reported results on May 13.
However, I believe that the company still reported strong results in several metrics. Additionally, the growth thesis remains robust going forward, as the headwinds behind the recent, more modest results are attributable to macro factors such as foreign exchange variations.
StoneCo trades at more attractive valuation multiples than its international peers and offers greater growth potential compared to the competition. Additionally, lower interest rates in Brazil in the short term should benefit STNE, making it an attractive and inexpensive growth stock.
StoneCo in the Financial Payment and Processing Industry
StoneCo’s business model in the financial payments industry focuses on providing integrated financial and software solutions for SMBs (small businesses) in the competitive Brazilian market. In 2023, the Financial Services segment accounted for 88% of the company’s revenues, with the remaining coming from Software.
The most recent data shows that StoneCo has an ~11.3% market share of the Brazilian payments market, which is led by Cielo (OTC:CIOXY) — a company in which Banco do Brasil (OTC:BDORY) has a stake — and Rede, a subsidiary of Itaú Unibanco (NYSE:ITUB). However, StoneCo has been the fastest-growing company in this market, with a revenue compound annual growth rate (CAGR) of 46.5% over the last five years.
In addition to its core payment services, StoneCo is diversifying its financial solutions through lending services and expanding credit offerings, such as working capital loans and receivables prepayment, to help businesses manage cash flow and invest in growth.
The company is also introducing products like insurance and investment options to provide a comprehensive suite of financial services. This strategic move positions StoneCo as a digital bank, allowing it to rival traditional banks in Brazil and enhance the company’s monetization capabilities.
StoneCo’s Business Turnaround and Recent Results
Since the COVID-19 pandemic significantly impacted StoneCo’s bottom line, resulting in a net loss of $243.7 million in 2021, the company has made a remarkable turnaround, as you can see below.
Over the past two years, StoneCo has restructured its business by reorganizing its management structure. This realignment aims to better target specific client segments and accelerate the integration of its software and financial solutions.
There have been several changes in the company’s technology management, including a reformulation of the Board of Directors last year and a CEO transition with Pedro Zinner taking the helm.
The turnaround has initially shown some promising developments, as, in 2023, StoneCo reported a net income of $328.2 million, marking its best annual result in history and a complete rebound from the challenges faced in 2021.
In terms of total payment volume (TPV), a key metric for financial payment companies that includes all processed payments regardless of the method used, StoneCo reported R$350 billion (roughly $70 billion) in 2023, reflecting an annual increase of 21%. Additionally, client deposits reached R$6.1 billion (approximately $1.22 billion), a solid annual increase of 52%.
The company’s most recent results, reported for Q1 2024, fell short of market expectations for a more robust bottom and top line. This can be primarily attributed to headwinds such as foreign exchange variations, as the Brazilian Real has been losing ground versus the U.S. dollar in the first quarter of this year.
However, despite this, total payment volume grew by 18% year-over-year, net income surged by 90% year-over-year, and expenses shrunk by 12% year-over-year. These results were aligned with the company’s guidance through 2027, which emphasizes growth (TPV), monetization (take rate), and efficiency (net income and expense control).
StoneCo Valuations Appear Attractive When Considering Growth Prospects
As StoneCo continues to meet its guidance and projections, the stock appears to be trading at discounted valuation multiples relative to its growth outlook.
StoneCo trades at a PEG ratio of 0.5x based on its forecasted earnings for the next 12 months, which is low compared to the payment and processing services industry average of 1.15x. This is notably below international peers such as Shift4 Payments (NYSE:FOUR), which has a PEG ratio of 0.88x, and DLocal Limited (NASDAQ:DLO), which has a PEG ratio of 0.95x.
Risks and Challenges Investors Need to Consider
Certainly, investing in a company primarily operating in Brazil entails inherent risks from the local economy and competition.
While Brazil’s interest rate is currently on a downward trend at 10.5%, and inflation is relatively under control — which is beneficial for economic activity — the payment services market is dominated by large, well-capitalized traditional banks, fostering intense competition for market share.
Moreover, Stone is in the process of integrating payments and banking services into a single solution, though significant milestones are yet to be achieved.
Is STNE Stock a Buy, According to Analysts?
The consensus among analysts covering STNE is predominantly bullish, with eight out of 11 analysts recommending a Buy. At the same time, the remaining three have a neutral recommendation, resulting in a Moderate Buy rating. The average price target for STNE stock is $19.85, suggesting upside potential of 42.9%.
Among the bullish analysts, Tito Labarta from Goldman Sachs (NYSE:GS) stands out with a Buy recommendation and a target price of $21 per share for STNE.
Labarta notes that StoneCo demonstrates strong growth potential and operational leverage, with net income significantly increasing yearly. When adjusted for internal accounting policy changes, earnings exceeded expectations.
Additionally, StoneCo’s core niche in MSMB (micro, small, and medium businesses) TPV is expanding, positioning the company to surpass its year-end targets for deposits and credit, indicating robust financial health and operational efficiency.
In contrast, Morgan Stanley (NYSE:MS) analyst Jorge Kuri has a neutral view of StoneCo with a $16.50 per share price target. He is concerned about the impact of competition in a rapidly commoditizing industry and anticipates potential pricing pressure as interest rates fall further and companies fight for market share.
The Bottom Line
StoneCo shares fell sharply after the company released its Q1 results, as it failed to beat Wall Street estimates, mainly due to temporary headwinds. However, the company still reported numbers that were very much in line with its guidance.
Considering that StoneCo trades at a very low multiple relative to its expected earnings per share (EPS) growth, I see a reasonable margin of safety for investors willing to buy this growth stock, especially after the recent sell-off. Therefore, I remain bullish on STNE stock.
