A lot of stocks have had a miserable 12 months. Yet few have performed worse than Warren Buffett-owned Brazilian fintech company StoneCo (NASDAQ: STNE). From its highs of $73 a share, the stock fell to a low of $8.05. That’s a plunge of around 89%.
The fall has been the result of problems with StoneCo’s credit operations (described in its Q2 2021 earnings report) and a write-down of the valuation of its investment in Brazilian digital bank Banco Inter (reported in Q3). But the stock is surging today in pre-market trading after the company reported earnings for Q4 last night.
I own StoneCo shares in my portfolio. The stock is up 24% in pre-market trading, which is a lot, but is nowhere near its former highs. Does this mean that the worst is over?
Q4 Earnings
The market is responding to StoneCo’s earnings report that was released last night. Total revenue increased 87% compared to Q4 2020. Looking forward, management expects Q1 2022 revenue will be between 113% and 119% higher than Q1 2021.
Payment volumes increased 54% compared to the same period a year ago. The company guided for an increase of between 79% and 83% in Q1 compared to the same quarter of the previous year.
The number of clients using StoneCo’s payment services also increased from 774,000 to 1.77m. In its comments, management predicted that the pace of new additions will decline somewhat in the first quarter of 2022.
Additionally, the company announced that it had brought forward the purchase of a number of point-of-sale units (those things that you tap your card on to pay for stuff) to avoid being hit by supply problems due to chip shortages. In 2022, the company intends to report its earnings by segment to give investors better visibility into how different parts of the business are performing.
Is StoneCo a buy?
To my mind, the report confirms what I thought before about the company. Over the last year or so, I’ve taken the view that the setbacks that the company has faced have been temporary impediments. That’s not to say that they haven’t had a real impact — they absolutely have — but it is to say that I didn’t think that the problems with the credit operation or the write-down from the Banco Inter deal would have a lasting impact. As a result, I’ve been buying shares since August 2021.
In my view, StoneCo’s troubles last year were teething issues. And these were limited to certain parts of its business. Excluding credit issues, the company’s revenue grew 68% last year. This is why I maintained the view that the stock was a fundamentally sound investment and continued to buy shares. I think that the earnings report from last night goes some way towards vindicating this view.
Management said last night that lessons have been learned from the difficulties of 2021. The company is playing to win and sometimes being too aggressive can have negative effects. There are clearly risks associated with investing in StoneCo. But I think that the business is on track and I believe that the current share price offers a huge discount to levels that I would be prepared to buy at, even after the likely jump in the share price today. I’m happy to hold and may buy more.
