Should I Invest in StoneCo Stock?

After a promising 2020, financial tech (fintech) company StoneCo Ltd. (STNE) had the year’s worst performance (-81.8%) in 2021, which may leave you wondering if StoneCo Ltd. is a solid investment for 2022 and beyond.  


StoneCo Ltd.
company nameStoneCo Ltd.
sectorTechnology
industrySoftware—Infrastructure
addressHarbour Place, George Town, Cayman Islands
countryCayman Islands
websitehttps://www.stone.co

About StoneCo Ltd.

StoneCo Ltd. is a Brazilian fintech firm that provides eCommerce solutions to clients through in-store, online, and mobile channel payment management. The company focus is client-centered, and the goal is to assist small- to medium-sized businesses.

The company made an initial public offering at between $21 and $24 per share in 2018 and saw immediate growth of stock value, with a 30% spike in value in the first two days. 

This initial spike was due, in part, to Berkshire Hathaway’s investment in the company, which also immediately improved investor confidence and gave the company unicorn status.

However, in December 2021, the stock value dipped to $14.95, far below its initial offering in 2018. StoneCo Ltd. experienced self-imposed and unavoidable challenges from multiple angles in 2021 that caused investors to lose confidence in the market value. 

StoneCo Ltd. reported a substantial loss on a strategic investment in 2021 and investors quickly took note. Brazil’s government also enacted several regulatory changes that impacted credit registry functionality, interest rates, and the Brazilian economy at large.

Let’s examine the history and prospects of the StoneCo Ltd. stock.

Bull Case

There is prospective long-term growth in the payments industry as Brazil’s economy recovers and grows, and StoneCo Ltd. is attempting to make moves that will help to position itself for growth in the long term.

Potential for Brazil’s Payments Industry

  • StoneCo Ltd. sees great potential to continue growing its micro-business client base.
  • The company boasts over 400,000 banking clients and 200,000 software clients.
  • It is estimated that 90% of Latin American micro-businesses still track finances on paper.
  • Only 3.2% of retail spending in Brazil is online, a figure which is no doubt impacted by the pandemic, but offers exponential room for growth.
  • StoneCo Ltd. remains positive that the payment industry will continue to grow as the Brazilian economy recovers.

StoneCo Ltd.’s Commitment to Retaining the Client Base

  • Brazil had multiple interest rate hikes in 2021 after starting at an all-time low of 2.0% in January and ending at 9.5% in December 2021.
  • StoneCo Ltd. chose to hold client pricing steady and operate within smaller margins in 2021 to offset funding challenges caused by the interest rate increases.
  • This appeared simply as a loss of profit to anyone who did not follow the company’s intentions closely through quarterly reports, press releases, and investor calls.
  • StoneCo Ltd. did not want to lose client confidence or negatively affect the client base.
  • They understand that they serve small- to medium-sized businesses and have pledged to make incremental changes to client pricing, despite continued inflation in the overall economy.

Profitability, Hedge Fund activity, and Investments

  • Despite a bad market value year, StoneCo Ltd. continued to generate significant profit. 
  • In late 2021, they posted an adjusted net income of 132.7 million reais ($24 million) for the quarter.
  • Berkshire Hathaway still backs Stone Co Ltd, and hedge funds continue to invest in STNE.
  • StoneCo Ltd. continues to make strategic investments in other companies that can help to expand its service and functionality, such as Brazilian retail software company Linx in 2020.

Bear Case

As stated, both internal and external plays impacted StoneCo Ltd. They made their own acknowledged mistakes in investment and credit disbursement, while regulatory changes made by the Brazilian government affected the entire payment industry.

Credit Business Impacts and Mistakes

  • Brazil made sweeping regulatory changes to the credit system that impacted payment companies such as StoneCo Ltd.
  • The credit registry system lost functionality in the summer of 2021 and StoneCo Ltd. responded conservatively by temporarily stopping credit disbursement in June 2021.
  • Before the summer of 2021, StoneCo Ltd. had already faced a loss due to difficulty in collecting disbursed credit because of fraudulent players and bad lending.
  • StoneCo Ltd. estimates that they will begin lending again in Q1.

Investment Loss

  • In attempting to make a long-term expansion gain, StoneCo Ltd. invested in Banco Inter to increase their potential customer base.
  • Banco Inter’s stock value crashed during Brazil’s tumultuous economic year.
  • StoneCo Ltd. reported this investment loss in 2021 Q3, causing STNE to dramatically plummet by 34% shortly after the loss was reported.

Brazil’s economy

  • Brazil’s economy is heading toward recession during the pandemic.
  • The delicate balance between inflation and interest rates has impacted all spending.
  • Brazil’s inflation rate was 10.7% in 2021 and invariably affected the bottom line of all companies operating in Brazil.
  • If StoneCo Ltd. stock is on its way back up, it will be a long road to recover value in this type of economy.

StoneCo. Competitors

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Final Verdict

Investors can see the potential for continued company growth and the need for eCommerce payment processing growth as small businesses continue to modernize around the world.

StoneCo Ltd. is already among the top 5 payment companies of Brazil. Although StoneCo Ltd. has taken the largest stock value hit in 2021, the company continued to operate at a significant profit and is trending upward in the acquisition of new clients. 

StoneCo Ltd. also seems to be positioning itself conservatively to ride out the storm and make greater gains when the Brazilian economy begins to recover from pandemic outcomes and the regulatory changes imposed in 2021. 

StoneCo Ltd. has acknowledged mistakes in launching its credit service and taken action to improve company missteps. 

The final action to buy, sell, or hold will depend on two things: 1. Your faith in StoneCo Ltd. as a company, and the actions the leadership takes to weather changes of the economy and pivot around their lessons learned and, 2. Your patience to hold your shares during Brazil’s recovery.  

It will also be important to continue monitoring the cumulative changes to the Brazilian economy as a whole if you are invested in any Brazilian company.

Experts predict that the economic recovery will be slow in 2022, but that inflation in Brazil will fall to 3.5% by 2023.

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