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StoneCo: Is the risk/reward worth it?

Opdateret: 24. apr.


It isn't often that you find a company that both Warren Buffett and Cathie Wood are invested in. Jack Ma also has a stake in the company through Ant Financial. The stock reached as high as $92 and is now trading at their all low under $11. The question is if the risk/reward is worth an investment?


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.


This analysis will be a bit different from what you are used to read in my blog. StoneCo is a growth company. So instead of using the principles I have learned from my Phil Town workshop, I use the principles I have learned from the GOAT academy. I should also mention that most of the numbers I use in this analysis is from Finbox, which I believe is a great tool to get different numbers from various companies.


Before I start with the analysis, I should mention that I do not currently own shares in StoneCo. It is a company I was aware of because of Berkshire Hathaway's investment but I never really investigated it in depth. With the Brazilian Real rising against the U.S dollar, and the high price of U.S. equities, I thought it was worth another look.


StoneCo is a Brazilian company that was founded in 2012. They describe themselves as a provider of financial technology solutions that empower merchants and integrated partners to conduct electronic commerce seamlessly across in-store, online and mobile channels in Brazil. In short, they have designed a cloud-based technology platform that helps clients to connect, get paid and grow their business. They also have banking services, while piloting insurance services that seems to be off to a good start, while their credit business and investments in the Brazilian Banco Inter haven't gone their way, more about that later. Their business model "The StoneCo Model" revolves around a client centric culture, which is quite interesting. It means that they open so-called Stone Hubs in different parts of Brazil, these work as local operations close to their clients, these all have integrated teams of sales, service, and operations support, which makes it possible for StoneCo to serve their clients in person in the matter of minutes or hours, and not in days as with some of their competitors, which is a competitive advantage, as their customers are small business owners. Furthermore, as they provide all these services to their customers, which are small business owners, StoneCo is building a switching moat, as it will be time consuming and difficult to switch provider.


Their CEO is Thiago Dos Santos Piau. He has been the CEO since 2017, and prior to becoming the CEO, he serves as COO and CFO at StoneCo. Before joining StoneCo, he founded Paggtaxi, which is a company that that facilitated the payment of taxi rides through a mobile app and credit card machine. Hence, he has some experience in the sector. He studied mechanical engineering at Universidade Federal do Rio de Janeiro and has also participated in the Key Executive Program and Owner President Manager programs at Harvard Business School. It is difficult to find much about Thiago Dos Santos Piau, and I cannot tell if he is the right person or not to lead StoneCo moving forward. However, Warren Buffett often talks about the importance of a good management, and as he is invested in the company, and Berkshire Hathaway probably having had meetings with the CEO, I feel like his seal of approval is good enough for me.

I believe that StoneCo already has a moat that will grow stronger moving forward, as they will get more customers. Unfortunately, I don't have much information about the management, but it isn't a concern as such. Later I will do a discounted cash flow model to calculate a price for StoneCo but before I do so, let us just have a look at some key financial metrics.


Down below we see some key financial metrics. While revenue is growing nicely in 2021, there are some concerns. The gross profit margin is declining year over year from 2019, and their operating income was negative in 2021, which is the first year since 2017 that StoneCo isn't profitable. The gross profit margin is still high, and up until 2021, StoneCo also delivered a good operating margin. In their latest earnings call, management acknowledged that they didn't execute as they should have in 2021 and has since made some organizational changes. Hence, 2021was not a good year but if StoneCo can get back to be profitable in 2022 with the same great margins as previously, it could still be an intriguing option.



Before we continue to the discounted cashflow model, I would like to investigate the risks and potential of StoneCo. One risk is that some of their business decisions haven't gone their way. I wrote earlier about their investment in Banco Inter and their credit business not performing as you would like. They had to write off BR$1,2 billion on their investment in Banco Inter due to share prices dropping, StoneCo owns approximately 5 % of the shares of Banco Inter. They also had to pause their credit business, as due to malfunctioning of the registry system, which resulted in losses, and management hasn't yet indicated when (if ever) it will be up and running again. Stone Hubs could be a risk. Stone Hubs seem to be a great idea, as it gives StoneCo a competitive advantage, but they are also expensive, as you need employees. If in Brazil we see labor cost rise, as in the rest of the world, it could make Stone Hubs a very expensive way to attract new customers. Right now, the payback period for each customer they get is 11-15 months, and it could get longer with higher labor costs. Higher interest rates. While StoneCo is protected against inflation, as their payments business captures a rate of nominal transactions, and the software business has inflation adjusted contracts, it is another story for higher interest rates because funding is an important resource to grow their company. Right now, StoneCo has decided not to transfer these extra costs of higher interest rates to their customers, to keep a good relationship. As a result, it has hurt their margins. Hence, they will need to find a balance through the right pricing strategy, which will keep margins high and customers in house. Brazil's economic environment. Brazil has a high inflation of more than 10 %, their GDP growth are expected to slow down, and we we have high unemployment. Furthermore, we have an election later this year, which could course even more uncertainty. StoneCo do not expect to expand into other countries in the next couple of years, meaning they will be largely affected if the Brazilian economy underperforms.


There are also lots of potential for StoneCo moving forward. Large room to grow their client base. StoneCo currently has 1,8 million customers, if you combine their small and midsize business (SMB) and micro clients. StoneCo estimates that there are 8 million SMB's and over 20 million micro clients in Brazil. It means that StoneCo has a lot of room to grow, if they can get their hands on those customers. Brazil switching to digital payments. Unfortunately, the latest numbers I could find through the World Bank is from 2017 but they still show the enormous potential for digital payments in Brazil. In 2017 electronic payments volume in Brazil represented 28,4 % of total household consumption compared to 46,0 % in the U.S and 68,6 % in the UK. 27 % of the population in Brazil, aged 15 or older had a credit card, compared to 65,6 % in the U.S and 65,4 % in the UK. 17,6 % of the Brazilian population aged 15 or older had used to internet to pay a bill or make a purchase, compared to 77,2 % in the U.S and 80,7 % in the UK. These numbers have undoubtedly increased in Brazil since 2017 but it must be expected they are still well behind the other countries. Integrating the acquisition of Linx into their software solutions. StoneCo acquired Linx in 2020, and we still haven't seen the acquisition being fully integrated into StoneCo. Nevertheless. the management believes that acquisition of Linx will result in long-term growth and has stated: "We're only in the beginning of our journey in combining software and financial services to bring even more tangible results to our clients and we're really excited about the opportunities ahead". In the paragraphs I will go through my calculations to find the intrinsic value of StoneCo.



I have now investigated the financials, risks, and potential of StoneCo I will now look at the price by doing a discounted cash flow model. To do so I will need some numbers that you can see below. The numbers are the 2021 numbers, which I could find at Finbox. However, the perpetuity growth rate and the discount rate are numbers I have come up with myself. The reason I chose 5 % as perpetuity growth rate is that it is usually a between the historical inflation rate of 2-3% and historical GDP growth of 4-5%. I decided to go with 5 %, which I usually use. The chosen discount rate of 12% is because it is usually between 9-12%, and due to the uncertainties explained previously, I decided to go with the highest. Remember that all the numbers made in these calculations are in millions.



I also need to determine how much EBIT, Depreciation & Amortization and Net Working Capital will evolve over the next couple of years. I decided to go with an EBIT growth of 44 % over the next years. It is the same growth as the last 5 years, and a bit lower than the expectations from analysts of 54 % in the next 5 years. Some might find the numbers too low, while other find them too high. I believe that Depreciation & Amortization will grow with 20 % a year over the next years, which is lower than the previous 4 years, while I think that Net Working Capital will grow by 10 % a year. As mentioned, these are all conservative numbers compared to the historical numbers but some I feel good about. I haven't found a smart way to share my spreadsheet here but once I made my calculations, I found the intrinsic value of StoneCo to be $15,1.


Having investigated StoneCo I find the company interesting, and using conservative growth rates, it still seems like the company is undervalued. The latest drop is based on different things, lower margins due to higher interest rates and their write-off of Banco Inter. If we see increasing interest rates in Brazil, it will further hurt a company like StoneCo. However, StoneCo has been profitable from 2018 to 2020, and they are gaining market shares every year. I believe there are plenty of potential for StoneCo, as Brazil still haven't switched to digital payments in the same rate as many other countries, while there are also a lot of potential customers out there. You must be aware that you need to be able to stomach volatility if investing in Brazil, or other emerging markets for that matter. All things considered; I believe that StoneCo is a good risk/reward investment but personally I would only make it a small position.


My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, you can read this post.


I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.


Some of the greatest investors in the world believe in karma, and to receive, you will have to give (Warren Buffett and Mohnish Pabrai are great examples). If you appreciated my analysis and want to get some good karma, I would kindly ask you to donate a bit to save the Golden Lion Tamarin, which is an endangered monkey in Brazil. If you have enjoyed the analysis and want some good karma, I hope that you will donate a little to save these fantastic animals here. Even a little will make a huge difference to save these wonderful animals. Thank you.



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