In a previous article, I discussed my views on one of Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) most innovative and fast-growing tech holdings, Snowflake (SNOW, Financial). In this article, we will take a closer look at another one of Berkshire's tech holdings: StoneCo (STNE, Financial).
StoneCo's advantages
I have been following StoneCo for a couple of years. The reason why I think this company is so interesting is because of what it offers. As a business owner and investor, I've experienced first-hand how challenging it can be for small businesses to deal with the admin side of the business. Technology has helped simplify the process, but it has also lead to complications.
For example, 10 years ago, taking payment was relatively simple. A business had a bank account, and customers would either pay in cash or by card to that one account. However, today, one business may have several payment systems, including a traditional bank account, online service such as PayPal (PYPL, Financial) and other specialist apps, all of which may provide a different service.
I am not saying the old system was necessarily better. It was more expensive and lacked flexibility. However, it was simple. Another challenge of multiple payment systems is accounting. Trying to reconcile several different accounts is time-consuming.
To overcome this issue, accounting providers now sync with different bank accounts and payment options. This has made the whole process much more efficient. Credit providers have also linked up with accounting software providers to streamline the credit approval process for small businesses. Ten years ago, a business would have to take hard copies of financial information to a bank and wait for the approval. Now the lender can scan transactions and produce forecasts in seconds.
The ability to offer small business clients a comprehensive package of management and financial tools is the reason why I like StoneCo. It offers an ever-growing suite of products, including point of sales solutions, e-commerce solutions and financial management.
A growing market
StoneCo's primary market, Brazil, is still in the relatively early stages of development regarding e-commerce and technology. Despite having the largest economy in South America, cash accounts for 74% of sales in Brazil compared to 28% of sales in the U.S. It has a $24 billion e-commerce market, but this accounts for just 3% of total retail sales.
These numbers suggest StoneCo has a huge opportunity. The world is becoming more and more digital, and some markets, such as Brazil, still have underdeveloped digital economies.
In some respects, StoneCo is where PayPal was 10 to 15 years ago, but the company offers much more than PayPal. It provides vital services that cross over from the digital to the real world, which will be essential during Brazil's transition.
The company itself is also developing its digital infrastructure. It rolled out its ABC platform in the fourth quarter of last year, which offers instant payments and wire transfers. It is also planning to launch its own full-business platform and is investing heavily in its banking platform.
This suite of products is building a competitive advantage around the company. While it operates in a competitive industry, speaking from experience, I can say small businesses don't tend to change banking and financial services providers very often due to the extra work and complications that can emerge. As StoneCo continues to invest in its offering, the chance that consumers will find something better elsewhere will only decline.
Unlike so many other fintech companies, StoneCo is also profitable. The company announced 187 million Brazilian reais ($35.84 million) of adjusted net income for the first quarter of its 2021 fiscal year, up 15.5% year-over-year. With income growing, the company should have no problem investing in its customer offering and increasing its moat in the years ahead.
