StoneCo Ltd. (STNE, Financial), the Brazilian fintech giant that shot to fame in 2018 when Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) revealed an investment in the company, had a challenging few years leading up to 2023.
The company’s credit practices came under fire in 2021. It eventually admitted to committing mistakes with its credit products and decided to pause those services later that year. After reaching a high of close to $95 in February 2021, StoneCo's stock dropped to a low of around $7 in mid-2022.
Shares traded sideways for a while before gaining a staggering 61% year to date.
The company, which provides an online platform for e-commerce transactions in Brazil, reported first-quarter earnings on May 17, which have received a muted market response so far.
Improving financial performance
For the first quarter of 2023, StoneCo reported total revenue of 2.7 billion Brazilian reals ($543.36 million), an increase of 31% compared to the same quarter last year. On the back of stellar revenue growth, the company also saw remarkable growth in its profitability. The adjusted Ebitda grew 55.70% from 803.60 million reals in the prior-year quarter to 1.25 billion reals, while net income increased to 237 million reals from 203.80 million reals a year ago.
The company also exceeded its guidance for earnings, which is a strong indication that StoneCo is finally moving in the right direction after taking steps to tighten its grip on credit products.
The MSMB payments client base, which is comprised of TON, Stone and Pagar clients, grew to 275,800 from 187,100 a year ago. The company added 232,000 net new payment clients in the last quarter, which is an improvement from the 212,000 net new additions in the fourth quarter of 2022. This is a promising sign as it highlights the company's continued growth at a time when the Brazilian economy is staging a comeback from inflationary pressures. The number of active banking clients more than doubled from 510,000 to 1.25 million as well.
The company, in a notable development, resumed its credit business in the first quarter. This time around, StoneCo is using a cautious approach to avoid the mistakes it made previously. According to company filings, it disbursed 6 million reals of the new credit product in the first quarter with a target of serving a maximum of only 200 clients in the initial phase of the product launch.
Further, to improve the credit product and meet the desired credit underwriting standards, StoneCo introduced several new features, which include:
- Preset monthly payments to offer more transparency to consumers.
- A new personal guarantee model to enhance credit safety.
- New dashboards to manage the credit portfolio.
- Full integration with the registry of receivables.
These improvements address some of the challenges the company faced in 2021 with its credit product. In addition, StoneCo remains focused on improving its decision-making algorithms by feeding it accurate, timely data.
The long runway for growth
StoneCo primarily serves small and medium-sized enterprises in Brazil. The SME segment forms the backbone of the Brazilian economy, so the company is benefiting from the massive demand for financial software and payment solutions as these players aggressively embrace online sales channels. Aided by the increasing internet penetration rate, Statista projects the e-commerce industry in Brazil will grow at a compound annual rate of 14.6% through 2027. This stellar growth will enable StoneCo to expand its target market. To make this happen, the company is now penetrating the micro business segment in addition to the SME segment, which seems like a prudent long-term decision given that many of these micro businesses will grow and upgrade themselves to the SME category.
According to PagBrasil, there are more than 30 million unbanked adults in Brazil, which is a target market that StoneCo is trying to tap into with its banking products. Even in the developed world, consumers seem to prefer fintech products over traditional banking services, so this characteristic will enable StoneCo to aggressively penetrate the unbanked population in Brazil as the country goes online.
Attractive valuation
StoneCo made losses in both 2021 and 2022, but has started 2023 on the right foot, reporting a profit. Further, the company has been profitable in each of the last three quarters amid the business transformation efforts implemented by the company.
At a forward price-earnings ratio of 24.60, StoneCo might seem expensively valued at first, but investors need to consider the fact it is well-positioned to grow in leaps and bounds in the coming years. With a revamped credit evaluation process, the company is ready to make the most of its credit products as well. For a company that is operating in a high-growth industry in a fast-growing economy, StoneCo seems fairly valued currently.
Takeaway
StoneCo reported strong earnings for the first quarter and the company seems well-positioned to grow. The market's reaction to the results has been disappointing, but could be a good opportunity for long-term investors.
