StoneCo: Harnessing Brazil's Potential in Digital Payments

StoneCo is a leading financial technology company in Brazil, focused on serving micro, small, and medium-sized businesses through an integrated platform of payment, banking, credit, and software solutions. Known for its strong distribution network and customer-centric approach, StoneCo has evolved beyond payment processing to become a broader financial partner to merchants. With the digitalization of commerce in Brazil still underway and new growth avenues in banking and lending, StoneCo is positioning itself to capture long-term value in a fast-changing market. The question is: Does this Brazilian fintech belong 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 is a Brazilian financial technology company founded in 2012, focused on empowering micro, small, and medium-sized merchants through a comprehensive ecosystem of payment, banking, credit, and software solutions. The company operates through two main business segments: financial services and software. In financial services, which generates the majority of its revenue, StoneCo offers payment processing, digital banking, and credit products. It serves micro-merchants through its Ton brand, which delivers easy-to-use, low-cost solutions via digital channels, and targets small and medium-sized businesses through its Stone brand, which offers bundled financial and banking services. In the software segment, StoneCo provides integrated point-of-sale systems, enterprise resource planning software, customer relationship management tools, e-commerce solutions, and order management systems tailored to a range of retail and service verticals. The 2021 acquisition of Linx, a leading retail software provider, enhanced StoneCo’s ability to combine financial and software services, particularly within verticals such as retail, gas stations, food, and drugstores. StoneCo has developed a unique operating model known as the Stone Business Model, built around hyper-local service. Through a network of over 600 proprietary and franchised Stone Hubs across Brazil, the company deploys integrated teams for sales, support, and logistics. This allows StoneCo to offer in-person service within hours - an important differentiator for small business clients - and has helped the company achieve consistently high customer satisfaction scores. Its competitive moat rests on four key pillars: a broad and efficient distribution network, excellent customer service, a fully integrated and proprietary technology platform, and high switching costs created by bundling multiple products. The company uses both in-person and digital channels - including hubs, self-onboarding tools, inbound sales, and strategic partnerships - to reach clients across nearly all of Brazil. StoneCo’s technology is designed to be flexible and scalable. It allows the company to quickly build new products and adapt them to different types of businesses. Since all services - payments, banking, and software - are connected through one platform, merchants can manage their operations in one place. As clients adopt more of StoneCo’s services, it becomes more convenient to stay, making switching providers increasingly difficult and reducing customer churn. Over the past several years, StoneCo has expanded through a series of well-planned phases: first building its payments business for SMBs, then entering the micro-merchant segment, launching its own banking platform, acquiring software capabilities, and most recently, relaunching its credit offering with improved governance. This evolution has significantly increased its market reach while improving efficiency and profitability per client.

Management

Pedro Zinner serves as the CEO of StoneCo, a position he assumed on April 1, 2023. Though relatively new to the CEO role, he is not new to the company, having served on StoneCo’s Board of Directors prior to his appointment. Pedro Zinner brings over 25 years of experience in strategy, finance, and risk management, with a strong track record of business transformation and operational leadership across multiple industries. Before joining StoneCo as CEO, Pedro Zinner was the CEO of Eneva S.A., one of Brazil’s leading power generation companies. During his tenure, he successfully led Eneva through a financial turnaround, transforming it from a company on the brink of bankruptcy into a profitable and respected player in Brazil’s energy sector. His leadership at Eneva is widely recognized as a case study in disciplined capital allocation and long-term value creation. Pedro Zinner’s earlier career includes senior roles at Painaiba Gas Natural, Vale, BG Group, and Banco Icatu, where he gained broad exposure to energy markets, infrastructure, and financial services. He holds a BA in Economics from Pontifícia Universidade Católica do Rio de Janeiro and an MBA from the University of Chicago Booth School of Business. As CEO of StoneCo, Pedro Zinner brings a pragmatic, shareholder-oriented mindset. His approach is grounded in long-term value creation, as reflected in his own words: “Moving forward, our goal remains clear, maximizing long-term intrinsic business value growth measured on a per share basis rather than merely emphasizing overall company size or scale.” Under his leadership, StoneCo is expected to maintain its disciplined focus on profitable growth, client-centric innovation, and operational excellence, while navigating Brazil’s complex macroeconomic and regulatory landscape. Given his proven ability to lead in dynamic environments and execute high-stakes transformations, Pedro Zinner appears well-positioned to guide StoneCo through its next chapter.

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.  StoneCo made its IPO in 2018, so we only have data from that point onward. Since then, the company has delivered ROIC above 10% in most years, with the exceptions of 2020 and 2021, which were significantly impacted by the pandemic. Encouragingly, StoneCo has meaningfully improved its performance in the past two years, with ROIC exceeding 20% in both years. While StoneCo does not explicitly highlight ROIC as a standalone strategic goal, the company’s actions suggest a strong focus on capital efficiency. CEO Pedro Zinner has emphasized optimizing the balance sheet and reducing capital costs—initiatives that support higher returns on capital. He has also stated that the company’s fundamental measure of success is long-term shareholder value creation, which stems from strengthening its leadership in the acquiring space and serving the MSMB segment. In his words, “Stronger market leadership translates into higher revenues, profitability, capital velocity, and returns on invested capital.” Based on this, I expect StoneCo to remain focused on capital discipline and continue to deliver high ROIC 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 saw a notable increase in 2020, mainly due to the acquisition of Linx. In 2024, however, equity declined following a large goodwill impairment tied to the software business, driven by revised growth expectations and a strategic shift in execution. While the impairment was excluded from adjusted financial results, it lowered reported net income and, as a result, reduced shareholder equity. Although StoneCo does not explicitly aim to grow equity as a core metric, its focus on capital efficiency and long-term value creation supports future equity growth. Given the one-time nature of the 2024 charge, I expect equity to increase meaningfully in 2025.

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 has only achieved positive free cash flow in three out of the seven years since its IPO. The surprise is that free cash flow turned negative again in 2024. This was mainly due to the company investing heavily in growth. It allocated more capital to customer financing and expanded its infrastructure and technology platforms. These types of investments are typical for fast-growing businesses and are intended to support long-term expansion. In addition, StoneCo recorded a BRL 3,6 billion accounting loss (a goodwill impairment) related to its software division. While this non-cash charge didn’t affect adjusted earnings or free cash flow directly, it did reduce reported profits and book value. Despite these headwinds, StoneCo ended the year in a solid financial position, with BRL 4,7 billion in adjusted net cash. Without the impact of share buybacks and credit-related investments, the company would have generated BRL 1,9 billion in net cash, demonstrating underlying cash-generating strength. StoneCo also has a clear capital allocation strategy. It focuses on maintaining healthy financial buffers and returning excess cash to shareholders only when there aren’t better growth opportunities. In the past two years, the company has actively repurchased shares, and since most of these shares are being canceled, the total number of shares outstanding has decreased. As a result, investors can expect fewer shares in circulation going forward, which supports growth in earnings per share. If we exclude the cash used on credit investments, the levered free cash flow margin would have been 13,2% in 2024. Based on this, the stock would have been trading at a free cash flow yield of 11,5% at the end of the year - an attractive level. However, we’ll return to valuation later in the analysis.

Debt

Another important aspect to consider is the level of debt. It’s crucial to assess whether a company has a manageable debt load - specifically, if it can repay its long-term debt within three years using its earnings. This is calculated by dividing total long-term debt by annual earnings. In 2024, StoneCo reported negative earnings due to reasons already discussed in the analysis. However, the company posted adjusted EPS of $1,27, so we’ll base the calculation on adjusted earnings. Using this figure, StoneCo has approximately 3,34 years of earnings in debt. This is slightly above the three-year threshold, but not a major concern in this case - especially considering the company maintains a strong net cash position.

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Risks

Bad business decisions are a risk for StoneCo. In the past, the company has made a few high-profile investments that failed to deliver the expected returns. In 2021, StoneCo invested in Banco Inter, a leading Brazilian digital bank, buying shares at BRL 57,84. The investment quickly turned into a loss as the share price dropped sharply. StoneCo eventually wrote off BRL 1,2 billion and sold its remaining shares in early 2023 for just BRL 12,96 per share. Another example is the 2020 acquisition of Linx, a retail software company, for BRL 6,04 billion. The goal was to expand StoneCo’s ecosystem and create opportunities to cross-sell financial services. However, the software division has consistently underperformed the core financial services segment. In 2024, StoneCo took a BRL 3,6 billion impairment charge on its software assets, signaling that the expected value from the Linx acquisition has not yet materialized. These decisions were made under the previous CEO, Thiago Piau, whose leadership helped scale StoneCo rapidly but also involved aggressive capital allocation that didn’t always deliver the desired outcomes. The consequences of those decisions are still being felt today. The Banco Inter investment resulted in a significant financial loss, while the Linx acquisition, though strategic in intent, has so far failed to generate the expected synergies. The software division continues to underperform and absorb management attention, and the BRL 3,6 billion impairment has raised questions about the valuation discipline behind the deal. While current CEO Pedro Zinner has brought a more measured and transparent approach to capital allocation - including a formal framework to guide decisions around excess capital, risk, and shareholder returns - investors may still view StoneCo through the lens of past missteps. These legacy issues can weigh on market confidence, dampen valuation multiples, and create a higher bar for future acquisitions or strategic moves. In other words, even though the leadership has changed, the burden of proving that capital will be used wisely going forward remains. StoneCo’s ability to consistently execute on its core strategy, demonstrate improved returns on invested capital, and rebuild trust with shareholders will be essential to restoring and sustaining long-term value.

Competition is a meaningful risk for StoneCo, particularly because the company operates in a highly crowded and dynamic market. Its core focus - serving micro, small, and medium-sized merchants—is also the most contested segment in Brazil's digital payments space. Numerous competitors have already established a strong presence in this market, including both traditional merchant acquirers tied to large financial institutions and well-capitalized fintech players. Many of these competitors have far greater financial, technological, and marketing resources than StoneCo. For example, bank-affiliated payment processors may benefit from lower costs due to internal infrastructure and regulatory advantages, such as avoiding the sponsorship fees StoneCo must pay to participate in payment networks. This allows them to offer lower transaction fees or more aggressive pricing to win over merchants - putting pressure on StoneCo to either match their pricing, which can squeeze margins, or risk losing clients. As competition intensifies, particularly with the rise of nontraditional payment platforms and credit providers, StoneCo may be forced to reduce prices to stay competitive, even if it means sacrificing short-term profitability. There’s also a risk that existing clients could be poached by larger players offering bundled financial services, better incentives, or more integrated ecosystems. In extreme cases, StoneCo might need to walk away from certain low-margin client relationships, which could hurt revenue growth.

Macroeconomics is a key risk for StoneCo because the company operates entirely in Brazil and is deeply tied to the country's economic, political, and regulatory environment. As a payments and financial services provider focused on micro, small, and medium-sized merchants, StoneCo's revenue is directly linked to consumer and business spending. If Brazil experiences an economic downturn, rising unemployment, or falling consumer confidence, transaction volumes across its network could decline - impacting both growth and profitability. The company is also exposed to inflation and interest rate fluctuations. For example, high inflation in Brazil can erode consumers’ purchasing power, increase StoneCo’s operating costs, and lead the central bank to raise interest rates. These rate hikes can reduce credit availability and increase the cost of funding for StoneCo's prepayment and credit operations. On the flip side, efforts to combat inflation, such as tightening monetary policy, can slow economic growth and depress spending - another headwind for StoneCo. Additionally, StoneCo is subject to Brazil-specific risks. The Brazilian government plays an outsized role in the economy and has a long history of intervention through monetary, fiscal, and regulatory policy changes. These actions - such as price controls, currency restrictions, or sudden tax changes - can create significant uncertainty and disrupt planning. For example, past government decisions have led to volatile inflation, rapid swings in interest rates, and foreign exchange instability. All of these factors can ripple through StoneCo’s business, from transaction volumes to capital costs. Finally, political instability remains an ongoing concern. Changes in government, unpredictable economic reforms, or market-unfriendly policies can reduce investor confidence and stall private-sector investment. Even if StoneCo executes its business strategy well, these macroeconomic and political variables - many of which are beyond its control - can have a material impact on its operations.

Reasons to invest

Expanding market potential is one of the key reasons to consider investing in StoneCo. While it’s often said that over 90% of household spending in Brazil now happens through electronic payments, that number can be misleading. It includes many types of transactions- like loans, real estate deals, and business-related spending - that aren’t part of everyday consumer purchases. When you focus only on true consumer activity, the use of digital payments is actually lower than it seems. This means there’s still plenty of room for StoneCo to grow as more Brazilians continue shifting away from cash. In addition, the opportunity for digital payments in Brazil isn’t limited to personal spending. In more developed markets like the U.S., total payment volumes are even higher than household spending because they also include things like business payments and person-to-person transfers. Brazil hasn’t reached that level yet, which means there’s still a lot of room to grow. For StoneCo, this opens the door to expanding beyond retail and capturing more volume from other types of transactions as the market matures. Brazil’s instant payment system, Pix, is creating new growth opportunities for StoneCo. Pix has become very popular and has replaced some debit card payments, but it hasn’t slowed down the use of credit cards, which are still growing by almost 15% each year. StoneCo is already making money from Pix transactions and is working on new features like Pix NFC (contactless payments), which could make it even easier for businesses to use. This could help StoneCo attract more merchants and generate additional revenue in the future. Importantly, Brazil’s shift from cash to digital payments is still underway. Even during economic downturns, like the 2014–2017 recession, electronic payments grew faster than the economy. This resilience and ongoing digital transition provide StoneCo with long-term structural tailwinds, positioning it well to capture a growing share of an expanding market.

StoneCo’s beyond-payments strategy is a compelling reason to invest. While the company began as a payment processor, it has successfully expanded into banking and credit services, giving it more ways to grow and better serve its customers. StoneCo is no longer just helping small businesses accept payments - it’s becoming their primary financial partner. One sign of this progress is the rapid growth in retail deposits, which surpassed company targets in 2024. This shows that more merchants are trusting StoneCo not only with payment processing, but also with holding their money. That kind of trust deepens the relationship between StoneCo and its clients. When businesses choose to keep their funds with StoneCo, they’re more likely to use additional services such as loans, payment tools, or payroll solutions. The company’s goal is to make the Stone account the central hub where clients manage all their finances - from getting paid to saving for the future. This strategy helps increase customer engagement and loyalty, while also reducing churn. It also opens up new revenue streams. StoneCo can earn interest from the deposits or use them to fund its lending operations, which strengthens both profitability and financial efficiency over time. Lending is another area of progress. After revamping its credit products, StoneCo is now offering more loans to its clients while keeping risk levels under control. This benefits both the company and its customers. Many small and medium-sized businesses struggle to access funding from traditional banks. StoneCo fills that gap, becoming a more valuable partner in helping them grow and manage daily operations. At the same time, lending brings in interest income and strengthens customer loyalty - businesses that take out loans are more likely to stay within StoneCo’s ecosystem. By offering a full suite of financial services, from business accounts to credit and payroll, StoneCo builds deeper relationships with clients. The more services a client uses, the more valuable they become - and the harder it is to switch to a competitor. This strategy makes StoneCo’s business more resilient and gives it more ways to grow over the long term.

StoneCo’s software business and its potential sale offer another reason to consider the company as an investment. While software currently plays a smaller role in overall profits—making up just 8% of adjusted earnings before taxes - it has served a valuable purpose by helping StoneCo cross-sell financial services like payments and banking. Over time, however, management realized that owning the software assets isn’t essential to continue this strategy. In fact, they’ve been more successful cross-selling through StoneCo’s financial services distribution channels than through the software unit itself. Because of this, StoneCo is rethinking its role as a software owner. The company is now focused on making the software division more efficient and cash-generative, while also exploring a potential sale of the business. Several buyers have already expressed interest, but none have offered a price that matches StoneCo’s estimate of the division’s intrinsic value. Until that happens, StoneCo will continue running the business while extracting as much value as possible from it. This situation is promising for investors for two reasons. First, selling the software division would simplify StoneCo’s business and allow it to focus entirely on its faster-growing and more profitable payments, banking, and lending segments. Second, a sale could bring in a meaningful amount of cash - analysts estimate the software division may be worth around BRL 4 billion, based on post-impairment equity values. That cash could be used to fund future growth or returned to shareholders through buybacks or dividends. Importantly, management has made it clear that they won’t sell the business for less than it’s worth. This disciplined approach to capital allocation - introduced under CEO Pedro Zinner - helps build confidence that future decisions will be based on long-term value, not short-term optics. Whether or not a sale happens soon, the software division is no longer a distraction from StoneCo’s core strategy. That clarity and focus strengthen the investment case.

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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 1,27, which is the adjusted EPS from the year 2024. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 43,7% in the next five years, but 15% is the highest number I use. Additionally, I have selected a projected future P/E ratio of 30, 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 $38,10. 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 $19,05 (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 (excluding the capital allocated to credit investments) was 332, and capital expenditures were 160. 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 112 in our calculations. The tax provision was 79. We have 296,8 outstanding shares. Hence, the calculation will be as follows: (332 – 112 + 79) / 296,8 x 10 = $10,07 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 (adjusted to exclude capital allocated to credit investments) at $0,92 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $14,52.

Conclusion

I believe that StoneCo is an intriguing company with strong management. It has built its moat on a broad and efficient distribution network, excellent customer service, a fully integrated proprietary technology platform, and high switching costs created by bundling multiple products. The company has achieved a return on invested capital above 20% in the past two years, which is a trend I expect to continue. Free cash flow was negative in 2024, but adjusted free cash flow reached a new record high, which is encouraging. Bad business decisions remain a risk for StoneCo, as past investments - such as its stake in Banco Inter and the acquisition of Linx - led to significant financial losses and underperformance. Although these decisions were made under the previous CEO, their consequences are still being felt today. Competition is a key risk because StoneCo operates in a crowded market where many larger rivals - especially bank-affiliated acquirers and well-funded fintechs - can offer lower prices or more attractive bundles. As competition intensifies, StoneCo may face pressure to reduce fees or risk losing clients, which could impact margins and slow growth. Macroeconomic conditions also pose a meaningful risk. StoneCo’s business is closely tied to Brazil’s economy, where inflation, interest rates, and consumer spending directly affect transaction volumes and credit performance. Expanding market potential is a compelling reason to invest, as Brazil’s shift from cash to digital payments is still ongoing, and true digital penetration remains lower than headline figures suggest. StoneCo’s beyond-payments strategy is another reason to invest. By evolving from a payment processor into a full financial partner for small businesses, the company strengthens client relationships, increases customer loyalty, and creates additional revenue streams that support long-term growth. StoneCo’s software business and the possibility of its sale also contribute to the investment case. A sale would allow management to sharpen its focus on faster-growing areas like payments and banking, and if done at a fair price, could unlock significant cash for growth initiatives or shareholder returns. Overall, I believe StoneCo is a high-quality company. For investors willing to stomach the volatility that comes with emerging markets, a small position at the Payback Time price of $14 could potentially be a good long-term investment.

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