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StoneCo: Warren Buffett believes the risk/reward is worth it.

Opdateret: 30. okt. 2023


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 significantly lower. 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 begin the analysis, I should mention that I do not currently own any shares in StoneCo. I previously ownedshares directly in StoneCo but sold them at a 50% profit. However, I own shares in both Berkshire Hathaway and Alibaba, which owns shares in StoneCo. Thus, I indirectly own shares in StoneCo. If you are interested in viewing the shares I own or copying my portfolio, you can find instructions on how to do so here. My indirect ownership of StoneCo shares will not affect this analysis, as I will maintain objectivity. 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 start your investment journey with as little as $50.



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 connect, get paid, and grow their business. They also offer banking services and have recently started piloting insurance services, which seems to be off to a good start. However, their credit business and investments in the Brazilian Banco Inter have not been successful. More details about this will be discussed later. Their business model, "The StoneCo Model," revolves around a client-centric culture, which is quite interesting. StoneCo opens Stone Hubs in various locations across Brazil. These hubs function as local operations that are conveniently located near their clients. Each hub has integrated teams for sales, service, and operations support. This allows StoneCo to provide in-person assistance totheir clients within minutes or hours, rather than days like some of their competitors. This quick response time is a competitive advantage for StoneCo, especially since their customers are small business owners. Furthermore, by offeringthese services to small business owners, StoneCo is creating a switching moat, as it will be both time-consuming and challenging for customers to switch provider.


Their CEO is Pedro Zinner. Pedro Zinner is new in the role of CEO, as he assumed the position on April 1st, 2023.However, he is not new to StoneCo, as he served as a board member at StoneCo before taking on the role of CEO. Prior to becoming the CEO at StoneCo, Pedro Zinner was the CEO at Eneva S.A., which is one of the leading power generating companies in Brazil. Pedro Zinner also has experience from companies such as Painaiba Gas Natural, Vale Mining, BG Group, and Banco Icatu. He holds a BA in Economics from Pontifícia Universidade Católica do Rio de Janeiro and an MBA from the Chicago Booth Graduate School of Business. Pedro Zinner has over 25 years of experience in strategy, risk management, and finance, gained through his previous roles. He has been recognized for the transformation of Eneva, taking a company that was on the verge of bankruptcy and turning it into one of Brazil's leading energy providers. We don't have much information on Pedro Zinner, and we have no results in StoneCo to assess him. I do appreciate his extensive experience and the results he has achieved at Eneva. However, at this point, the management situation at StoneCo is uncertain.

I believe that StoneCo already has a moat that will continue to strengthen in the future as they acquire more customers. However, I lack sufficient information about the management, which is an aspect that requires close monitoring. I will later perform a discounted cash flow analysis to determine a price for StoneCo. But before doing so, let's examine somekey financial metrics.


Below, we will examine some important financial metrics. Revenue continues to grow steadily each year, which is always pleasing to see. The gross profit margin remains consistently high, but it is worth noting that while the gross profit margin was higher in 2022 than in 2021, it is lower than in 2020. It is the same pattern we see in the operating margin, EBITDA margin, and EBIT margin. Nonetheless, the profit margins are still high, so it isn't something that I'm concerned about. 2021 stands out, and management has previously acknowledged that they didn't execute as they should have in that year. However, it is good to see that they are back on track in 2022. It is also worth noting that despite margins increasing in 2022, StoneCo still hasn't returned to profitability. It is something that I would like to see in 2023.



Before we proceed with the discounted cash flow model, I would like to examine the risks and potential of StoneCo. One risk is that some of their business decisions haven't gone their way. I previously mentioned their investment in Banco Inter and the underperformance of their credit business. They had to write off BR$1,2 billion on their investment in Banco Inter due to a drop in share prices. StoneCo sold its remaining shares of Banco Inter in February 2023. Previously, they also had to pause their credit business due to a malfunction in the registry system, which resulted in losses. Stone Hubs could pose a risk. Stone Hubs seem to be a great idea as they provide StoneCo with a competitive advantage. However, they can also be expensive due to the need for employees. If labor costs rise in Brazil, as they have in the rest of the world, it could make Stone Hubs a very expensive method of attracting new customers. Right now, the payback period for each customer they acquire is 11-15 months, and it may increase further due to rising labor costs. High 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 a different story for higher interest rates because funding is an important resource to grow their company. Previously, StoneCo decided not to pass on these additional costs resulting from higher interest rates to their customers in order to maintain a strong relationship. As a result, it did hurt their profit margins. Hence, they will need to find a balance through the right pricing strategy that will keep margins high and customers in-house. Brazil's Economic Environment. Like most other countries, Brazil has high inflation. Furthermore, their GDP growth isexpected to slow down, and we have high unemployment. StoneCo does not expect to expand into other countries in the next couple of years, which means they will be greatly affected if the Brazilian economy underperforms.


There is also a lot of potential for StoneCo moving forward. There is a large room to grow their client base. StoneCo currently has 2,5 million customers when combining their small and midsize business (SMB) and micro clients. StoneCo estimates that there are 8 million SMBs and over 20 million micro clients in Brazil. It means that StoneCo has a lot of room to grow if they can acquire those customers. Brazil is switching to digital payments. Unfortunately, the latest numbers I could find through the World Bank are from 2017, but they still demonstrate 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 the 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 that they are still well behind those of other countries. Integrating the acquisition of Linx into their software solutions. StoneCo acquired Linx in 2020, and we have yet to seethe effects of the acquisition. However, the integration of Linx into StoneCo is on the right path and StoneCo's software segment reached an EBITDA margin of 16,2 % in Q4 2022, which is the highest since StoneCo acquired Linx. Management has high hopes for the software and has previously stated, "We're only at 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 next 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 analyze the price by using a discounted cash flow model. To do so, I will need some numbers that you can see below. The numbers are the 2022 figures, which I found on Finbox. However, I have determined the perpetuity growth rate and the discount rate myself. The reason I chose a 3% perpetuity growth rate is that it typically falls between the historical inflation rate of 2-3% and the historical GDP growth rate of 4-5%. I decided to go with 3%, which is in the middle. The chosen discount rate of 12% is based on the fact that it typically falls within the range of 9-12%. Given the current market conditions, I opted for the highest rate available. Remember that all the numbers used 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 have decided to pursue an EBIT growth of 20% over the next few years, which aligns with the analysts' expectations of 21,5% as reported by Finbox. I believe that Depreciation and Amortization will grow at a rate of 20%, while I plan to keep Net Working Capital flat over the next five years. 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 $27,8.


Having investigated StoneCo, I find the company interesting. There are some uncertainties regarding management because the CEO is new, but I feel comfortable due to their vast experience. StoneCo does not expect to expand outside of Brazil any time soon, which means that when investing in StoneCo, you are dependent on the Brazilian economy, and you need to have the stomach for that. However, it is also one of the reasons that the investment case of StoneCo is intriguing, as the transition to digital payments in Brazil is lagging behind most western countries. This means that a company like StoneCo could experience significant growth. I don't know if it is a risk per se, but I would like to see StoneCo becomeprofitable again. I just feel better investing in profitable companies. Finally, investing in emerging market stocks is going to be a rollercoaster ride, and you will need to be able to stomach that if you're investing in StoneCo. All things considered, I believe that the risk/reward of investing in StoneCo is worth it if you can acquire the stocks at a price below 50% of their intrinsic value, around $14. However, I would personally keep the position small.


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