StoneCo: Harnessing Brazil's Potential in Digital Payments

StoneCo is one of Brazil’s leading financial technology companies and a fast growing provider of payment, banking, and credit solutions for micro, small, and medium sized businesses. Known for its strong local presence and customer focused approach, the company combines a hyper local distribution network with an integrated financial ecosystem that helps merchants manage payments, deposits, lending, and day to day business operations. By expanding beyond payments into banking and credit while focusing on efficiency, customer engagement, and long term value creation, StoneCo aims to strengthen its position as a trusted financial partner for Brazilian merchants. The question remains: Does this fintech leader deserve a spot in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in StoneCo at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of StoneCo, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

StoneCo was founded in 2014 and has grown into one of Brazil’s leading financial technology companies focused on serving micro, small, and medium-sized businesses. The company was established with the goal of challenging the traditional Brazilian banking system, which had historically underserved smaller merchants through expensive services, poor customer support, and inefficient financial solutions. StoneCo initially built its business as a payment processor, helping merchants accept card payments through point-of-sale terminals, but has gradually evolved into a broader financial services ecosystem that combines payments, digital banking, credit, and merchant management tools. Today, StoneCo serves more than 4.8 million active clients across Brazil, ranging from small street vendors and local shops to larger regional retailers and service businesses. The company’s mission is to become the financial operating system for Brazilian merchants by helping them manage their payments, cash flow, financing needs, and daily financial operations through one integrated platform. StoneCo generates most of its revenue through payment processing fees, earning a merchant discount rate on transactions conducted through its proprietary POS terminals and digital payment solutions. Merchants can accept a wide range of payment methods, including credit cards, debit cards, Pix, Brazil’s instant payment system that allows money transfers in real time, boletos (bank payment slips commonly used in Brazil), and online payments, making StoneCo an essential infrastructure provider for commerce in Brazil. Beyond payment processing, StoneCo offers prepayment solutions, which allow merchants to receive cash from card sales immediately instead of waiting for traditional settlement periods. This service is particularly valuable for small businesses that rely heavily on stable cash flow to manage inventory, payroll, and day-to-day operations. Over time, StoneCo has expanded beyond payments into digital banking by offering merchant-focused bank accounts designed specifically for business owners. Through its banking platform, merchants can manage cash balances, pay suppliers, issue invoices, pay taxes, transfer money instantly through Pix, manage employee payroll, and handle multiple aspects of financial administration directly through StoneCo’s platform. This integration between payments and banking is important because it allows merchants to conduct more of their financial lives inside the Stone ecosystem, while also improving convenience and operational efficiency. Credit has also become an increasingly important part of StoneCo’s strategy. After initially struggling with its lending business during the pandemic, the company rebuilt its credit operations with improved governance, more disciplined underwriting, and repayment models better aligned with merchant cash flow. StoneCo now offers working capital loans, credit cards, and revolving credit products tailored specifically for the needs of small businesses. A distinguishing feature of its lending approach is that repayment can be linked directly to merchants’ transaction volumes, reducing risk and creating a financing structure more synchronized with the realities of small business operations. StoneCo also offers several value-added tools that support merchants in running their businesses more efficiently, including TapTon and TapStone solutions that transform smartphones into payment terminals, payroll management solutions, subscription payment tools, and checkout solutions for e-commerce. The company previously attempted to broaden its ecosystem further through the acquisition of software provider Linx, but after evaluating its strategy, StoneCo decided to divest the software business in 2026 and return its focus toward financial services, payments, banking, and credit. This reflects management’s belief that the strongest opportunity lies in becoming the leading integrated financial platform for Brazilian merchants rather than operating a broader software ecosystem. StoneCo’s competitive moat is primarily built on its hyper-local distribution network, superior customer service, integrated merchant ecosystem, and ability to use merchant data to make better lending decisions. The company’s most distinctive advantage is its Stone Hubs model, which provides a physical local presence across Brazil that many competitors struggle to replicate. Rather than relying exclusively on digital onboarding or centralized customer support, StoneCo built a network of more than 650 proprietary and franchised hubs distributed across all Brazilian states. These hubs contain integrated teams of salespeople, logistics personnel, and customer support professionals who work closely with local merchants. This localized presence enables StoneCo to establish stronger customer relationships, particularly in smaller cities and underserved regions where traditional banks and fintech competitors often have weaker penetration. Through its Stone Agents and Specialists, the company is able to provide tailored sales support, understand merchant needs more deeply, and respond quickly to operational problems. StoneCo’s Green Angels further reinforce this advantage by providing on-demand field support, often reaching merchants within hours to replace terminals, solve connectivity issues, or resolve technical problems. This level of local support creates trust and reliability, which are especially valuable for small businesses that depend on payment systems to operate daily. For many merchants, downtime in payments directly impacts sales, making responsive support an important competitive advantage. Another important part of StoneCo’s moat comes from ecosystem stickiness and switching costs. A merchant may initially join StoneCo to accept card payments, but over time the relationship can deepen significantly as the merchant adopts additional products such as digital banking accounts, Pix transfers, payroll tools, working capital loans, credit cards, and cash flow management services. As more of the merchant’s financial activities become integrated into StoneCo’s ecosystem, the inconvenience and operational friction associated with switching providers increase substantially. This integration not only improves customer retention but also increases customer lifetime value because StoneCo can deepen monetization without incurring the same acquisition costs repeatedly. The company’s focus on integrating merchants’ money flows with operational workflows strengthens this stickiness further, making StoneCo increasingly central to a merchant’s daily business operations. StoneCo also benefits from a strong service advantage, which has historically differentiated the company in a Brazilian financial system often characterized by bureaucracy and poor customer experiences. From its beginning, StoneCo emphasized a client-centric culture focused on solving merchant problems quickly and effectively. The company combines self-service tools, AI-powered chatbots, WhatsApp support, in-person servicing through hubs, and centralized customer relationship teams called enchanters to create a high-touch service experience. This emphasis on service is deeply embedded in StoneCo’s culture and helps strengthen merchant loyalty, satisfaction, and retention. In industries where products can become commoditized over time, superior customer experience can become an important source of differentiation. Finally, StoneCo benefits from a meaningful data advantage that supports both its financial services and lending operations. Because the company processes payment volumes and manages banking activity for millions of merchants, it has access to real-time information about merchant sales, seasonality, payment behavior, and cash flow trends. This gives StoneCo a better understanding of merchant health than traditional banks that often rely on delayed financial reporting or static historical information. By observing the real-time velocity of merchant transactions, StoneCo can adjust credit limits, manage risk more effectively, and personalize product offerings based on merchant needs. This creates a feedback loop where payments and banking activity strengthen lending capabilities, while lending deepens customer engagement with the broader ecosystem. Over time, this integrated model can reinforce customer relationships and improve profitability.

Management

Mateus Schwening serves as the CEO of StoneCo, a role he assumed in 2025 after playing an important role in the company’s transformation and operational turnaround. His appointment came at a pivotal time for StoneCo as the company sought to simplify its business, restore operational discipline, and sharpen its focus on its core strengths within payments, banking, and credit solutions for Brazilian merchants. Having already been deeply involved in StoneCo’s strategic direction before becoming CEO, Mateus Schwening entered the role with extensive knowledge of the company’s operations, culture, and long-term ambitions. His promotion reflects the confidence that StoneCo’s leadership and board have in his ability to continue building intrinsic value while improving execution across the organization. Before becoming CEO, Mateus Schwening held senior leadership responsibilities within StoneCo and was regarded internally as one of the key architects behind the company’s transformation. Following a period in which StoneCo faced challenges related to credit losses, complexity from acquisitions, and a more difficult operating environment, management worked to refocus the organization around operational excellence and disciplined execution. Mateus Schwening played an important role in helping restore focus by simplifying the company’s priorities, strengthening execution, and reinforcing a culture centered on serving merchants effectively. This included supporting StoneCo’s strategic evolution from a business heavily associated with payment acquiring toward a broader financial ecosystem integrating payments, banking, and credit solutions. StoneCo’s leadership team has publicly expressed strong confidence in Mateus Schwening’s ability to lead the company through its next phase of growth. Management has described him as bringing clarity of direction, analytical rigor, and an appropriate sense of urgency to the organization. These qualities are particularly important for a company like StoneCo, which operates in a highly competitive and fast-moving financial services market where execution, pricing, risk management, and customer experience can significantly influence long-term performance. His leadership style appears grounded in disciplined decision making, simplification, and a focus on the areas where StoneCo believes it can create the most value for merchants and shareholders alike. Since becoming CEO, Mateus Schwening has continued emphasizing StoneCo’s core mission of helping Brazilian merchants grow their businesses through integrated financial services. Under his leadership, the company has maintained a strong focus on improving customer experience, increasing cross-selling across payments, banking, and credit products, and strengthening operational efficiency. A major strategic step during this period was the divestment of the Linx software business, which reflected StoneCo’s intention to focus more narrowly on becoming the leading financial operating system for Brazilian merchants rather than operating a broader software ecosystem. This simplification aligns closely with Mateus Schwening’s emphasis on focusing organizational resources on what matters most and improving execution within the company’s highest-return opportunities. An important aspect of Mateus Schwening’s leadership appears to be his commitment to balancing growth with discipline. StoneCo’s earlier experience with credit losses demonstrated the risks associated with aggressive expansion, and management has since emphasized healthier growth, stronger underwriting practices, and better alignment between merchant cash flow and lending products. Mateus Schwening has been closely associated with this more disciplined operating philosophy, which prioritizes sustainable value creation over short-term expansion. This focus is especially important in Brazil’s financial ecosystem, where macroeconomic volatility and changing competitive dynamics require careful risk management. Beyond financial performance, Mateus Schwening also appears aligned with StoneCo’s long-standing client-centric culture, which has been a defining feature of the business since its founding. StoneCo has consistently emphasized close relationships with merchants, superior customer service, and a sense of ownership among employees. Maintaining this culture while scaling the business remains an important challenge for management, particularly as StoneCo continues expanding its merchant ecosystem and financial services offerings. Given his involvement in StoneCo’s transformation and his reputation for disciplined execution, analytical thinking, and operational focus, Mateus Schwening appears well positioned to lead StoneCo through its next phase of growth. His experience inside the organization and emphasis on simplicity, efficiency, and merchant value creation align closely with StoneCo’s ambition to strengthen its position as the leading financial platform for Brazilian micro, small, and medium-sized businesses.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Since StoneCo went public in 2018, we only have data from that point onward. Since its IPO, StoneCo has delivered ROIC above 10% in most years, with the notable exceptions of 2020 and 2021, when returns were significantly impacted by the pandemic and challenges within the company’s early credit operations. Encouragingly, StoneCo has delivered a substantial improvement in profitability and capital efficiency over the past three years, with ROIC reaching particularly strong levels and exceeding 20% in recent years. While these returns are impressive, it is important to understand why ROIC has improved so meaningfully and whether these levels are sustainable moving forward. Several structural characteristics of StoneCo’s business model help explain why the company has recently generated strong returns on invested capital. First, StoneCo benefits from a highly scalable and relatively asset-light business model. Unlike traditional banks, StoneCo does not require a large branch network or extensive physical infrastructure to grow. Much of its business is powered through software, payment infrastructure, and local sales and service hubs. Once the platform is built, incremental payment volume and additional clients can be added at relatively low marginal cost, which creates operating leverage as revenue grows faster than expenses. This scalability becomes especially powerful as merchants adopt more products within the ecosystem. Second, StoneCo’s improving mix toward higher-margin financial services has contributed meaningfully to stronger returns. While payment acquiring remains the foundation of the business, the company has increasingly expanded into banking, prepayment solutions, and credit. These services often carry higher returns than payment processing alone, particularly when StoneCo can leverage existing merchant relationships without materially increasing customer acquisition costs. The integration of payments, banking, and credit allows StoneCo to monetize merchants across multiple products while spreading fixed costs across a broader revenue base. As more merchants deepen their engagement with the platform, profitability per client can improve significantly, supporting higher ROIC. Third, StoneCo benefits from a strong distribution advantage through its Stone Hubs and localized service model. While maintaining a physical presence across Brazil creates some operating costs, this network helps improve merchant retention, cross-selling opportunities, and customer lifetime value. StoneCo’s local support structure enables the company to build deeper relationships with merchants and increase product penetration over time, which supports attractive economics relative to the amount of invested capital required. Fourth, StoneCo’s growing data advantage supports better capital allocation and lending outcomes. Because the company processes merchant payments and increasingly handles banking activity, it has access to real-time information about merchant sales, seasonality, and cash flow patterns. This allows StoneCo to assess credit risk more effectively than traditional institutions that often rely on delayed financial information. Following the difficulties experienced in its earlier lending efforts during the pandemic, management rebuilt the credit business with tighter governance and stronger underwriting discipline. If executed properly, this can allow StoneCo to earn attractive returns on lending while controlling losses, which should support strong overall returns on invested capital. The exceptionally high ROIC seen over the past three years has also been supported by management’s stronger focus on operational discipline and capital efficiency. After a period where StoneCo expanded aggressively into software and struggled with credit execution, management shifted toward simplification, profitability, and disciplined allocation of capital. This has included optimizing the balance sheet, improving operating efficiency, and focusing resources on the company’s highest-return opportunities within payments, banking, and credit. Management has repeatedly emphasized long-term intrinsic value creation and has noted that stronger market leadership should translate into higher profitability, greater capital velocity, and improved returns on invested capital. Looking ahead, I believe StoneCo can continue generating attractive ROIC, although maintaining the very elevated levels of recent years may become more challenging as the business evolves. The key drivers of strong returns remain in place. StoneCo still benefits from a scalable platform, increasing ecosystem monetization, high customer retention, and growing financial services penetration. The continued expansion of banking and credit products could further improve profitability if executed responsibly. However, there are also factors that may limit future ROIC expansion. Credit is inherently more capital intensive than payments, meaning that as lending becomes a larger part of the business, the capital base will likely grow. Increased competition in Brazilian fintech and payments could also pressure margins over time, while investments in product development, technology, and merchant acquisition may temporarily weigh on returns. Even so, StoneCo’s strong competitive position, disciplined management approach, and increasingly integrated merchant ecosystem suggest that the company should be able to sustain ROIC well above average levels for financial services companies in the years ahead.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. StoneCo’s equity has been more volatile than many companies, with periods of both strong growth and meaningful declines. These fluctuations are primarily explained by acquisitions, profitability swings, and accounting adjustments rather than by instability in the underlying business. Since StoneCo only became a public company in 2018, we have a shorter history to evaluate, but even within this limited period, the reasons behind the movements are relatively clear. The large increase in equity seen in 2020 was mainly driven by StoneCo’s acquisition of Linx, a Brazilian software company focused on retail management systems. When companies make large acquisitions, equity can increase because the acquired business and its value are added to the balance sheet. At the same time, StoneCo was still benefiting from strong growth in its core payments business, which supported profitability and shareholder value creation. However, the following years became more volatile as the company faced challenges related to the pandemic, rising interest rates, and problems in its early lending operation, which pressured profitability and reduced the pace of equity growth. The decline in equity in 2021 was largely the result of weaker profitability and a difficult operating environment. StoneCo experienced losses tied to its original credit portfolio, which management later shut down and rebuilt with stricter lending standards and stronger oversight. Because profits that are kept inside the business are an important driver of equity growth, periods of lower earnings naturally weigh on equity. While this period was difficult, management ultimately recovered almost all of the credit losses, and the experience appears to have made the company more disciplined in how it manages risk. Equity remained relatively stable in 2022 before increasing meaningfully again in 2023, reflecting stronger profitability and better execution. StoneCo benefited from higher efficiency, improving monetization across payments and banking, and stronger capital discipline as management simplified the business and refocused on its core strengths. The company’s improving profitability can also be seen in management’s comments that return on equity increased to 26% in 2025, reflecting stronger earnings generation and more efficient use of shareholder capital. Strong returns on equity are generally supportive of long-term equity growth because they allow companies to create more value from the capital already invested in the business. The large decline in equity in 2024 was mainly driven by StoneCo reducing the estimated value of its software business after growth expectations changed and management shifted strategy. Although this was primarily an accounting adjustment rather than a sign that the core business was deteriorating, it reduced reported profits and therefore lowered shareholder equity. This explains why equity fell sharply despite StoneCo continuing to improve operationally within payments, banking, and credit. Importantly, this appears to have been more of a one-time reset than a sign of structural weakness in the business. Encouragingly, equity increased again in 2025, which suggests that StoneCo has returned to building shareholder value following the 2024 decline. This recovery was supported by stronger profitability, improved execution, and a more focused strategy after the sale of the software business. By simplifying the company and concentrating resources on payments, banking, and credit, management appears to be improving both profitability and the efficiency with which capital is used. Looking ahead, I believe equity is likely to continue increasing over time, although probably with some volatility. The key drivers supporting future equity growth remain in place. StoneCo operates a scalable and relatively asset-light business model, continues to deepen relationships with merchants through cross-selling, and is becoming increasingly profitable as more clients adopt banking and credit products. The company’s strong return on equity also supports continued value creation if management can maintain disciplined execution. However, equity growth may not be smooth from year to year. Credit expansion requires additional capital, competition may affect profitability, and future strategic decisions could occasionally create volatility. Even so, given StoneCo’s improving profitability, strong returns, and renewed focus on its core business, I expect equity to continue trending upward over the long term.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. StoneCo’s free cash flow history has been more volatile than many mature companies, with negative free cash flow during the first three years following its IPO, followed by three years of positive cash generation, before turning negative again in 2024 and returning to positive territory in 2025. While this volatility may initially appear concerning, it is important to understand the reasons behind these movements, as they are largely tied to StoneCo’s growth strategy, capital allocation decisions, and the nature of its financial services business. The negative free cash flow seen between 2018 and 2020 was primarily driven by StoneCo’s rapid expansion phase. During this period, the company invested heavily in growing its payments infrastructure, acquiring customers, expanding its distribution network, and strengthening its technology platform. As a fast-growing fintech company attempting to gain market share in Brazil, StoneCo prioritized scaling the business over short-term cash generation. This type of cash flow profile is not unusual for younger, high-growth companies that are investing aggressively to establish competitive advantages and build long-term customer relationships. Free cash flow turned positive in 2021 and remained positive through 2023 as StoneCo became more profitable and benefited from stronger operating leverage. The company had already built much of its core infrastructure, allowing more revenue to flow through the business without a similar increase in costs. At the same time, management became more disciplined following the problems experienced in the earlier credit operation. StoneCo simplified parts of the business, improved efficiency, and focused more heavily on profitability and capital discipline. As a result, the company generated increasingly healthy levels of cash flow despite continuing to invest in growth. The negative free cash flow seen again in 2024 was mainly driven by increased investments in growth rather than a deterioration in the underlying business. StoneCo allocated more capital toward customer financing as it expanded its credit offerings and also continued investing in technology and infrastructure to strengthen its merchant ecosystem. This is an important distinction because financial services businesses often require additional capital when lending activity increases. In other words, part of the negative free cash flow reflected growth investments that management expects to support higher earnings in the future. Encouragingly, StoneCo still ended the year in a strong financial position, and management noted that excluding share repurchases and increased credit investments, net cash generation would have remained positive, highlighting the underlying strength of the business model. The return to positive free cash flow in 2025 is encouraging and suggests that StoneCo is improving its ability to balance growth with cash generation. Stronger profitability, better operational efficiency, and more disciplined capital allocation all contributed to this improvement. Management also highlighted ongoing expansion in profitability and capital efficiency, with return on equity reaching 26%, reflecting stronger earnings generation from the existing capital base. While free cash flow margins remain lower than what one would typically see in highly scalable software businesses, this is partly explained by StoneCo’s growing credit business, which naturally requires more capital to fund merchant loans. Looking ahead, I expect StoneCo to remain a positive free cash flow generator over time, although volatility should be expected from year to year. The company’s payments and banking businesses are highly scalable and should continue benefiting from operating leverage as StoneCo grows. Increasing adoption of higher-margin products such as banking, prepayment solutions, and credit should also support stronger cash generation. However, periods of lower free cash flow may still occur if StoneCo chooses to invest heavily in expanding its lending portfolio, technology capabilities, or merchant acquisition efforts. Because StoneCo operates partly as a financial services company, cash flow will likely be less stable than what investors might expect from traditional software or consumer businesses. StoneCo also has a relatively clear capital allocation strategy regarding how free cash flow is used. First, the company reinvests cash into growing the business through technology improvements, product development, expanding financial services, and strengthening its merchant ecosystem. Credit expansion also requires additional capital, making reinvestment an important part of StoneCo’s growth strategy. Second, when management believes there are no immediate high-return opportunities to deploy capital internally, excess cash is returned to shareholders. In recent years, StoneCo has actively repurchased shares, and management has emphasized its commitment to continuing this approach. In 2025, the company identified more than BRL 2 billion in excess capital for shareholder returns, while proceeds from the sale of Linx released an additional BRL 3 billion that management intends to return to shareholders. Because most repurchased shares are canceled, the total share count decreases over time, which supports long-term growth in earnings per share. The free cash flow yield suggests that StoneCo’s shares are currently trading at a premium valuation. However, we will revisit valuation later in the analysis.

Debt

Another important aspect to consider is the level of debt. It is crucial to assess whether a company has a manageable debt load, specifically whether it can repay its long-term debt within three years using its annual earnings. This is calculated by dividing total long-term debt by annual earnings. Based on this calculation, StoneCo has 3,9 years of earnings in debt. While this is slightly above my preferred three-year threshold, I do not consider it a major concern in StoneCo’s case. One reason is that the company holds a significant amount of cash, which gives it financial flexibility and reduces risk. In addition, part of StoneCo’s debt supports the company’s financial services activities, particularly its lending operations, which are designed to generate returns over time. Management has also shown increasing discipline in how it allocates capital and manages risk following earlier challenges in the credit business. Overall, while StoneCo’s debt level is slightly higher than I would ideally prefer, I believe it remains manageable given the company’s financial position, improving profitability, and focus on disciplined growth.

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Risks

Previous bad business decisions is a risk for StoneCo because the company has a history of making large strategic investments that failed to deliver the expected returns. While StoneCo has built an attractive business helping Brazilian merchants manage payments, banking, and credit, its past capital allocation decisions demonstrate that even strong businesses can create disappointing shareholder outcomes if management deploys capital poorly. These decisions continue to matter because they influence investor confidence and highlight the importance of disciplined execution going forward. One of the clearest examples was StoneCo’s investment in Banco Inter in 2021. StoneCo purchased shares in the Brazilian digital bank at an average price of BRL 57,84, believing the partnership could strengthen its financial ecosystem and create opportunities to expand beyond merchant acquiring. At the time, the strategic logic appeared reasonable, as both companies operated within financial services and shared ambitions around digital banking. However, the investment quickly turned into a significant loss as Banco Inter’s share price declined sharply. StoneCo ultimately wrote off approximately BRL 1,2 billion and exited the investment in early 2023 at around BRL 12,96 per share. The episode raised concerns because the investment moved StoneCo away from its core area of expertise and suggested that management may have overestimated the strategic benefits while underestimating downside risk. Another important example was StoneCo’s acquisition of Linx in 2020 for BRL 6,04 billion. The acquisition was intended to transform StoneCo into a broader merchant ecosystem by combining retail software with payments and financial services. Management believed this would create cross-selling opportunities, allowing merchants using Linx software to adopt StoneCo’s payment and banking solutions more easily. In theory, this could have strengthened customer relationships and increased long-term profitability. However, execution proved more difficult than expected. The expected synergies failed to materialize to the degree management had hoped, and the software business consistently underperformed compared to StoneCo’s core financial services operations. By 2024, StoneCo significantly reduced the estimated value of the software business, recognizing that the expected benefits had not materialized as planned. Eventually, management decided to sell Linx and refocus entirely on StoneCo’s core strengths in payments, banking, and credit. StoneCo’s early lending business also serves as an example of previous execution mistakes. The company aggressively expanded into merchant credit during the pandemic but struggled with losses as economic conditions deteriorated. Management later acknowledged that underwriting standards and controls were insufficient for the environment at the time, forcing StoneCo to shut down and rebuild the lending operation from scratch. Although the company eventually recovered most of the losses and redesigned the business with tighter controls, the experience demonstrated how quickly rapid expansion into adjacent areas can backfire if risk management is not strong enough. These decisions were primarily made under former CEO Thiago Piau, whose leadership helped scale StoneCo rapidly but also involved aggressive expansion into new areas. To management’s credit, StoneCo today appears significantly more disciplined. The company has simplified the business, exited software, rebuilt the lending operation with stronger oversight, and placed greater emphasis on profitability, capital efficiency, and shareholder returns. Current leadership has emphasized staying focused on StoneCo’s core strengths and returning excess cash to shareholders when attractive growth opportunities are not available. However, the risk remains relevant because StoneCo operates in a fast-moving industry where new growth opportunities constantly emerge. Payments, banking, and financial technology are highly competitive sectors, and management will likely continue facing pressure to expand into adjacent products, partnerships, or acquisitions. Investors therefore need confidence that future capital allocation decisions will be more disciplined than in the past. While StoneCo appears to have learned from previous mistakes, rebuilding trust takes time. The company’s ability to stay focused on its merchant ecosystem, avoid unnecessary complexity, and consistently generate strong returns on capital will be essential to proving that earlier business decisions were lessons rather than recurring patterns.

Competition is a risk for StoneCo because the company operates in one of the most competitive and rapidly evolving financial technology markets in the world. StoneCo focuses primarily on serving micro, small, and medium-sized businesses in Brazil, which is also one of the most contested areas within digital payments and financial services. The company competes not only against other fintech firms but also against large traditional banks, payment processors, digital banks, e-commerce ecosystems, and new entrants continuously trying to win market share. If StoneCo fails to maintain its competitive advantages, it could face slower growth, weaker profitability, and increasing pressure on customer retention. One of the main challenges for StoneCo is pricing pressure. Many competitors, particularly bank-affiliated payment processors such as Cielo and Rede, can afford to operate with lower profitability in payments because they use merchant acquiring as part of a broader banking relationship. In practice, this means banks may offer attractive payment processing terms, lower transaction fees, or bundled financial products to attract and retain merchants, even if the payment business itself generates limited profit. Since StoneCo’s business model depends heavily on transaction fees and financial services revenues, more aggressive pricing by competitors could pressure margins or force StoneCo to lower prices to remain competitive. While management has stated that the Brazilian payments market currently remains rational from a pricing perspective, competition tends to move in cycles, and periods of more aggressive pricing behavior could emerge in the future. StoneCo also faces competition from large fintech platforms that benefit from scale and broader ecosystems. Companies such as PagBank and Mercado Pago have built massive user bases and can leverage their digital ecosystems to attract merchants. Mercado Pago, for example, benefits from its close connection to MercadoLibre’s e-commerce and logistics platform, allowing it to offer merchants an integrated experience that combines payments, online selling, and financial services. These ecosystem advantages can make customer acquisition cheaper and strengthen customer retention. Traditional banks also represent an increasing competitive threat. Historically, many large Brazilian banks focused more on large corporate customers and paid less attention to smaller merchants. However, as digital payments and merchant banking have grown, banks such as Itaú and Bradesco have become increasingly active in serving smaller businesses. These institutions can bundle payment terminals together with loans, business bank accounts, payroll services, and other financial products in order to strengthen customer relationships. Because banks already have large balance sheets, trusted brands, and existing customer relationships, they may have structural advantages when competing for merchants. In some cases, they may even be willing to offer payment processing at very low profit margins if it helps deepen broader banking relationships. Another competitive risk comes from changes in how payments are made in Brazil. Pix, Brazil’s instant payment system, has grown rapidly and changed consumer behavior. While Pix increases digital payment activity overall and gives StoneCo another payment method to offer merchants, it also carries lower fees than traditional credit card transactions. This creates a potential risk because a larger shift toward Pix could reduce revenue generated from card payments, which historically have been more profitable. The launch of recurring payment features such as Pix Automático could further accelerate this trend if consumers increasingly replace installment card payments with instant transfers. Over time, this could pressure StoneCo’s profitability unless the company finds ways to monetize Pix transactions through additional services. The continued shift from physical retail toward e-commerce also presents a challenge. As more businesses move online, large marketplace platforms are increasingly integrating their own payment systems, banking solutions, and lending services directly into their ecosystems. This reduces the need for merchants to use independent providers like StoneCo. If more merchants choose to process transactions through marketplace-controlled payment systems instead of StoneCo’s infrastructure, it could reduce payment volumes and limit growth opportunities.

Macroeconomic factors is a risk for StoneCo because the company operates entirely in Brazil and is deeply tied to the country’s economic, political, and regulatory environment. Unlike global companies that can offset weakness in one market with strength in another, StoneCo depends fully on the health of the Brazilian economy. Since the company primarily serves micro, small, and medium-sized merchants, its performance is closely linked to consumer spending, business activity, and overall economic confidence. If Brazil experiences weaker economic growth, rising unemployment, or lower consumer confidence, merchants may process fewer transactions, which could directly reduce StoneCo’s payment volumes and revenue growth. A challenging economic environment can also put pressure on StoneCo’s merchant base. Small businesses are generally more vulnerable to economic slowdowns than larger companies because they often have fewer financial resources and less flexibility to absorb weaker demand. If consumers spend less or businesses struggle, some merchants may close, reduce activity, or delay investments. This not only affects payment volumes flowing through StoneCo’s platform but can also impact demand for banking products, prepayment services, and credit solutions. Management has already acknowledged that the macroeconomic environment has recently weighed on smaller merchants and slowed payment volume growth, demonstrating how sensitive the business can be to economic conditions. Interest rates represent another important risk. Brazil’s benchmark interest rate, known as the Selic rate, plays a major role in StoneCo’s economics. Higher interest rates can have mixed effects on the business. On one hand, StoneCo may benefit from charging higher rates on merchant credit products. On the other hand, higher rates increase borrowing costs for merchants, reduce access to financing, and often weaken consumer demand. Higher rates also increase the cost of funding parts of StoneCo’s financial services operations, particularly prepayment services where merchants receive cash earlier than normal settlement periods. If interest rates rise significantly, it could reduce merchant demand for financing while also increasing financial pressure across StoneCo’s ecosystem. In more difficult economic environments, higher rates may also increase the risk that merchants struggle to repay loans, leading to higher credit losses. StoneCo is also exposed to political and regulatory uncertainty in Brazil. The Brazilian government historically plays a large role in the economy and has frequently introduced significant policy changes affecting taxation, lending, monetary policy, and financial regulation. These changes can create uncertainty for businesses and financial markets. New regulations around digital payments, interchange fees, lending rules, or capital requirements for fintech companies could alter the economics of StoneCo’s business model. Brazil’s central bank has been particularly active in reshaping the payments landscape through innovations such as Pix, the country’s instant payment system. While Pix has increased digital payment adoption overall, it also carries lower fees than traditional card payments, which could pressure profitability if consumer behavior shifts too far away from higher-margin card transactions. Political instability also remains an ongoing risk. Brazil has historically experienced political volatility, changing policy priorities, and periods of social unrest, all of which can affect investor confidence and economic growth. Political uncertainty can lead to swings in interest rates, inflation, and the Brazilian currency, making it harder for businesses and consumers to plan for the future. Upcoming elections and potential policy changes can create further uncertainty, particularly if investors become concerned about fiscal discipline or economic reforms. Because StoneCo generates all of its business in Brazil, it cannot diversify away from these country-specific risks.

Reasons to invest

Expanding market potential is a reason to invest in StoneCo because the company operates in a large and still growing market where digital payments, banking services, and merchant financing continue to gain share. Brazil is one of the world’s largest economies and has experienced continued growth in both consumer spending and electronic transactions. Since StoneCo primarily serves micro, small, and medium-sized businesses, the company benefits from long-term structural trends such as increasing digitalization, business formalization, e-commerce growth, and the broader adoption of financial technology solutions. Even though StoneCo has already reached meaningful scale, management believes the company has penetrated only a small portion of its long-term market opportunity. One of the clearest growth drivers is the continued shift from cash toward digital payments in Brazil. Over the past decade, electronic payments have steadily increased as consumers and businesses become more comfortable with digital transactions. Card transaction volumes in Brazil have continued growing at double-digit rates, supported by higher consumer spending and increasing payment penetration. This trend benefits StoneCo directly because more electronic transactions generally lead to more payment volume flowing through the company’s platform. Importantly, many small businesses in Brazil still remain underpenetrated in financial services compared to developed markets, which means StoneCo still has a long runway for growth. The growth of Pix, Brazil’s instant payment system, represents another major opportunity. While some investors initially feared that Pix could disrupt payment processors, StoneCo increasingly views it as a growth driver rather than a threat. Pix has accelerated the digitalization of payments and increased financial inclusion across Brazil, helping move transactions away from cash. Merchants increasingly use Pix QR codes through StoneCo’s terminals, allowing them to receive payments instantly and at lower costs than traditional card transactions. Pix also improves transaction visibility and reduces operational friction for merchants, making it easier for businesses to manage payments. StoneCo has already begun building products around Pix, including financing and installment solutions, which could create additional revenue streams over time. As Pix adoption expands further, StoneCo appears well positioned to benefit by embedding itself deeper into merchants’ daily operations. The micro and small business segment itself also represents a major long-term opportunity. Brazil has millions of merchants, many of which have historically been underserved by traditional financial institutions. Smaller businesses often lacked access to affordable payment systems, merchant financing, or business-focused banking services. StoneCo’s local service model and integrated ecosystem are designed specifically to address these needs. Management estimates that the micro-merchant segment alone represents a very large opportunity with millions of potential customers, while the small and medium-sized business segment represents an even larger revenue opportunity. Because StoneCo already has local sales and service infrastructure across Brazil, it is well positioned to continue gaining share over time. E-commerce growth also provides another avenue for expansion. While StoneCo historically focused more on physical retail merchants, digital commerce in Brazil continues growing rapidly. As more merchants expand online, StoneCo has opportunities to strengthen its omnichannel capabilities and offer payment and financial solutions across both physical and digital channels. Management has repeatedly emphasized the importance of continuing to evolve the platform to meet merchants’ changing needs as commerce becomes increasingly digital.

Beyond payments is a reason to invest in StoneCo because the company is increasingly evolving from a payment processor into a broader financial services platform for Brazilian merchants. While payments remain the foundation of the business, management believes the largest long-term opportunity lies in banking and credit, where revenue potential, profitability, and customer stickiness are significantly higher. Rather than simply helping merchants accept payments, StoneCo aims to become the primary financial partner for small businesses by managing their cash flow, deposits, lending needs, and day-to-day financial operations. If successful, this transition could materially increase customer lifetime value and create a more diversified and resilient business model. Historically, StoneCo’s business was centered around payment processing, where the company earns fees every time merchants accept card or digital payments. While this remains an attractive business, payments alone may eventually face pricing pressure and slower growth as the market matures. Management therefore increasingly views payments as the entry point into a much larger ecosystem. Once a merchant starts processing payments with StoneCo, the company can offer additional financial products that deepen engagement and increase monetization. This strategy matters because banking and credit tend to carry higher margins and stronger long-term economics than payment processing alone. Banking is one of the clearest examples of this opportunity. StoneCo has been steadily growing its merchant banking platform, which allows businesses to manage deposits, pay suppliers, process payroll, and manage cash flow directly within the Stone ecosystem. Adoption has already been encouraging. StoneCo’s banking client base grew more than 20% year over year, reaching 3,7 million active clients, while deposits increased to BRL 11,1 billion. Importantly, deposits are growing faster than payment volume, which suggests merchants are increasingly trusting StoneCo with a larger share of their financial activity rather than simply using the company as a payment provider. This matters because deposits create recurring revenue opportunities and strengthen the company’s relationship with merchants. StoneCo is also increasingly adding workflow tools designed to help merchants run their businesses more efficiently. These tools help businesses manage everyday operations such as payroll, cash management, and financial administration. Importantly, management has stated that the goal is not necessarily to generate large service fees from these tools but rather to increase customer loyalty and engagement. The more functions merchants manage through StoneCo, the harder it becomes to switch providers. This deeper integration increases customer lifetime value and strengthens StoneCo’s competitive position over time. Credit represents perhaps the biggest long-term opportunity. Management has repeatedly emphasized that the largest revenue potential in Brazil’s merchant ecosystem comes from deposits and lending. Small businesses in Brazil have historically struggled to access affordable financing, creating a meaningful gap in the market that StoneCo aims to address. By leveraging payment and banking data, StoneCo can better understand merchant activity and offer more personalized lending products. Because the company sees merchants’ payment flows in real time, it gains insights into sales patterns and cash generation that traditional banks may not have. This gives StoneCo an advantage when assessing risk and tailoring financing solutions. StoneCo’s credit business is still relatively early but is already scaling rapidly. The company’s loan portfolio reached approximately BRL 2,8 billion in 2025, while credit revenue continued growing strongly. Management has emphasized that the current portfolio remains only a fraction of the long-term opportunity and believes StoneCo may already be ahead of its original growth plans. Importantly, the company appears to be taking a much more disciplined approach than during its earlier lending missteps. Following problems in its first lending operation during the pandemic, management rebuilt the credit business with tighter controls, stronger pricing discipline, and more careful risk management. While some volatility should be expected as the portfolio matures, management believes the combination of growing yields and stable risk levels should support stronger earnings contributions over time. Another attractive aspect of the beyond-payments strategy is diversification. By expanding into banking and credit, StoneCo becomes less dependent on payment processing fees alone. This could make earnings more resilient over time, particularly if growth in one business line temporarily slows. Management has already highlighted that banking and credit are becoming increasingly meaningful contributors to profitability, while higher adoption of deposits and financing solutions should help support margin expansion going forward.

Improving efficiency is a reason to invest in StoneCo because the company appears to be entering a new phase where growth is increasingly supported not only by expanding revenue but also by becoming more productive and efficient. Historically, StoneCo focused heavily on scaling its business, expanding its customer base, and building out its ecosystem across payments, banking, and credit. While growth remains important, management is now placing greater emphasis on improving profitability and operating leverage through smarter processes, automation, and better resource allocation. If executed successfully, this could support stronger margins and higher earnings growth over time. One important aspect of StoneCo’s strategy is that management views efficiency improvements as a long-term practice rather than a one-time cost-cutting exercise. Management has emphasized that investors should not expect large restructuring programs or dramatic short-term savings. Instead, StoneCo is focused on gradually redesigning how the company operates across multiple areas of the business, with efficiency expected to improve steadily through 2026, 2027, and beyond. This approach is important because sustainable efficiency gains often create more durable long-term value than temporary cost reductions. AI is expected to play a particularly important role in this process. Over the past several quarters, management has highlighted a meaningful acceleration in practical AI adoption throughout the company. However, unlike many companies that pursue dozens of disconnected AI projects, StoneCo appears to be taking a disciplined and focused approach. Rather than adopting technology simply because it is popular, management is prioritizing initiatives where there is a clear path toward measurable productivity gains and economic benefits. Customer service is one of the clearest examples of early progress. StoneCo has already introduced AI systems to handle first-level customer interactions, allowing simpler issues to be solved automatically before human employees become involved. Management has described this initiative as highly successful, generating meaningful efficiency improvements. This matters because StoneCo’s business model historically relied heavily on large operational teams and localized service through its hub network. If AI can handle repetitive tasks more efficiently, the company may be able to scale customer service while growing costs at a slower pace than revenue. The opportunity extends well beyond customer service. Management is actively redesigning several important areas of the business, including sales processes, merchant support, risk management, and internal operations. In sales, smarter systems may help improve productivity by allowing teams to prioritize higher-value opportunities more effectively. In lending and risk management, AI could improve decision making by identifying patterns in merchant behavior and improving risk assessment. Since StoneCo already has access to real-time payment and banking data from millions of merchants, better analytical tools could help the company improve pricing, reduce losses, and allocate capital more effectively. Importantly, most of these potential benefits are still early and are not meaningfully reflected in management’s financial guidance. Management has been careful not to promise large short-term gains from AI or automation because many initiatives remain new and outcomes are still being tested. However, this may actually make the opportunity more attractive from a long-term perspective. If StoneCo successfully improves productivity across customer service, operations, risk management, and sales, profitability could improve more than investors currently expect.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 1,58, which is the adjusted EPS from the year 2025. I have selected a projected future EPS growth rate of 13%. Finbox expects EPS to grow by 13,3% in the next five years. Additionally, I have selected a projected future P/E ratio of 26, which is twice the growth rate. This decision is based on StoneCo's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $34,47. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy StoneCo at a price of $17,23(or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 124, and capital expenditures were 22. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 15 in our calculations. The tax provision was 75. We have 262,3 outstanding shares. Hence, the calculation will be as follows: (124 – 15 + 75) / 262,3 x 10 = $7,01 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With StoneCo's Free Cash Flow Per Share at $0,39 and a growth rate of 13%, if you want to recoup your investment in 8 years, the Payback Time price is $5,62.

Conclusion

I believe that StoneCo is an intriguing company with strong management. It has built its moat through its hyper local distribution network, superior customer service, integrated merchant ecosystem, and ability to use merchant data to make better lending decisions. StoneCo has achieved a high ROIC in the past three years, and that trend is expected to continue moving forward. Free cash flow has been somewhat volatile over the years, but it is expected to grow moving forward as the company continues scaling its payments, banking, and credit businesses. Previous bad business decisions are a risk for StoneCo because the company has a history of making costly strategic moves, such as the Banco Inter investment, the Linx acquisition, and the initial rollout of its lending business, that failed to deliver the expected returns. Although management appears more disciplined today and has refocused on StoneCo’s core strengths, investors still need confidence that future expansion efforts and capital allocation decisions will avoid repeating past mistakes. Competition is a risk for StoneCo because the company operates in a highly competitive market where fintech firms, large banks, payment processors, and e commerce platforms are all competing for the same merchants. More aggressive pricing, bundled financial offerings from banks, the growing adoption of lower fee payment methods such as Pix, and the rise of integrated marketplace ecosystems could pressure StoneCo’s growth, margins, and ability to retain customers over time. Macroeconomic factors are a risk for StoneCo because the company operates entirely in Brazil and is highly dependent on consumer spending, business activity, and the financial health of small businesses. Economic slowdowns, higher interest rates, inflation, political instability, or regulatory changes could reduce payment volumes, weaken demand for banking and credit products, increase loan losses, and pressure profitability. Expanding market potential is a reason to invest in StoneCo because the company operates in a large and growing market supported by increasing digital payments, financial inclusion, e commerce growth, and rising adoption of banking and credit services among small businesses in Brazil. Despite already serving millions of merchants, StoneCo still appears to have significant room to grow as it expands beyond payments and captures a larger share of merchants’ financial activity. Beyond payments is a reason to invest in StoneCo because the company is evolving from a payment processor into a broader financial services platform where banking and credit may become larger drivers of growth, profitability, and customer loyalty over time. By deepening relationships with merchants through deposits, lending, and workflow tools, StoneCo can increase revenue per client, create a more resilient business model, and reduce reliance on payment processing alone. Improving efficiency is a reason to invest in StoneCo because the company is increasingly focused on growing profits not only through revenue growth but also by becoming more productive through automation, smarter processes, and AI. If management succeeds in improving efficiency across areas such as customer service, sales, and risk management, StoneCo could grow earnings faster than revenue over time while improving margins and scalability. While there are many things to like about StoneCo, I personally believe there are better opportunities in the market. Hence, I will not be investing in StoneCo at this time.

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