StoneCo

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

A Brazilian payment technology and software company that empowers merchants to conduct commerce seamlessly across physical, online, and mobile channels, offering a range of financial and digital solutions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: StoneCo is a financial technology company based in Brazil, aiming to provide payment processing and software solutions. It serves a wide spectrum of merchants, from small local shops to large national retailers, assisting in e-commerce, banking and management. While it operates primarily in Brazil, it is attempting to expand to new geographic markets.

  • Revenue Distribution:
  • Financial Services: Primarily includes transaction, subscription, and equipment rental revenues from payments processing, credit, and banking services.
  • Software: Generates revenue from SaaS solutions, digital advertising, and other technology services.
  • Recently it is focusing on integrated offerings and providing both banking and software tools together.

Latest News and Concerns: StoneCo’s recent 2023 Q4 earnings call highlighted several themes. The company is reporting significant growth in its financial services segment, specifically through its multi-channel sales and banking services offerings. The company’s strategy is to provide integrated financial services, as the combination of software and payment processing seems to be showing success for attracting small to medium sized merchants. Management discussed that the credit portfolio’s improvement and the stabilization of interest rate volatility have reduced losses in credit. However, it is facing increased competition from larger banks such as Banco do Brazil and Caixa Econômica, who are offering subsidized credit lines. The company is trying to offer improved customer support to protect its high retention rate of above 90%. On the cost management front, StoneCo has decreased their personnel costs and streamlined several processes to improve operating efficiency. The company expects that this combination will help to achieve long-term profitability targets. StoneCo has also highlighted regulatory concerns in Brazil as a risk, as they are facing new policies from the central bank and congress.

  • Trends in the Industry:
  • The fintech sector is experiencing significant growth, particularly in digital payments and financial services.
  • The trend of integrating software and financial solutions is becoming more evident.
  • The competitive environment is intensifying as traditional financial institutions are digitizing their processes and new tech players are entering the market.
  • The trend toward consolidation, with companies seeking scale and efficiency through mergers and acquisitions.
  • Margins: StoneCo aims to improve margins by streamlining operations, cutting costs, and increasing high margin products, notably its financial solutions. These initiatives will help it to achieve its long-term profitability goals.
  • Competitive Landscape:
  • Intense competition from major banks and digital payment giants.
  • Competition over price and services is increasing.
  • The pressure to innovate and adapt quickly to changing consumer preferences and regulatory requirements is significant.
  • What Makes StoneCo Different:
  • They offer a focus on integrating software into their payment platform. This integration helps to create high switching costs.
  • They are focusing on providing customized and unique services, that are tailored to customer specific needs.
  • They have focused heavily on acquiring smaller businesses in order to acquire new talent and improve its offerings and solutions.

Financials in Depth: (Based on Form 20-F and Earnings Calls)

  • Revenue: StoneCo’s revenue growth has been strong, mainly driven by the financial segment. For full year of 2022, StoneCo’s revenue was at R$10,449.9 million, and this has grown to R$2,326 million in 2021 and R$6,600 million in 2020. The recent Q4 2023 reported revenue of R$3.2 Billion.
  • Profitability: StoneCo is not a consistently profitable company, and the net loss for the year ended in December 31, 2022 was R$652.6 million. The company’s profitability has improved in the latest quarter of 2023, to R$142.5 million in net income. The fluctuation in profitability is tied closely to the credit portfolio, and is influenced heavily by market volatility. It seems like with the stabilization of the interest rates, the profitability has begun improving.
  • Operating expenses: Increased due to the cost of expansion and integration. To improve profitability, StoneCo has reduced spending on general and administrative expenses and improving operational efficiency.
  • ROIC (Return on Invested Capital): ROIC was at 12.7 percent at the end of 2022 and improved in 2023, although it still is under pressure due to increased capital intensity. StoneCo management is taking steps to control capital spending to improve ROIC over time.

Moat Rating: 2 / 5 StoneCo’s moat is considered narrow. Although it has a notable presence in Brazil’s payment processing market, competitive challenges from well-established banks and newer fintech players pose a strong threat to its market share. Their unique offering of combined software and fintech services does offer a niche for them. However, this niche has yet to see a large scale adoption rate. Also, the switching costs are high, but they do not extend to the entirety of their operations.

  • Intangible Assets: Strong brand presence in the payment sector, but not strong enough for a wide moat.
  • Customer Switching Costs: Offers switching costs, specifically with its software integration with payment systems.
  • Network Effects: The company’s network effect is present between users and merchants, where the value increases as more people use the service. This network effect is still in development and faces competition from well-established players.
  • Cost Advantages: StoneCo does have significant control over its cost of acquisition and has some influence on its cost of processing. These advantages do not give it the scale advantages needed to create a wide moat.

Legitimate Risks to the Moat and Business Resilience:

  • Increased competition: Larger banks and new fintech companies can erode StoneCo’s market share.
  • Regulatory Changes: Stringent regulations from Brazil can affect StoneCo’s profitability or market position.
  • Financial instability: Fluctuations in interest rates or economic turmoil can significantly impact profits from their credit services.
  • Technological disruptions: Emergence of new technologies that could render StoneCo’s current solutions obsolete.

StoneCo is not currently a business which is recession-resistant. However, the ability of management to scale the platform efficiently and increase their offering while maintaining customer retention, are the key factors that will improve its business resilience. Their ability to navigate regulations, expand into new markets, and maintain strong relationships with their clients will ensure long-term viability.

Understandability: 3 / 5 StoneCo’s core business of providing payment processing and integrated financial solutions is relatively straightforward. Understanding the various business segments and the regulatory frameworks under which they operate, particularly in Brazil, makes it slightly complex. Also, the interconnectedness of their financial and software solutions and their impact on profitability and overall business performance is difficult to follow. Further, the various government regulations and their consequences for StoneCo is also difficult to understand.

Balance Sheet Health: 3 / 5

  • Leverage: StoneCo has increased reliance on debt due to acquisitions and funding. Their debt-to-equity ratio has increased from 0.39x in 2021 to 0.57 in 2022. However, management aims to bring this ratio to 15% over the long term. This dependence on debt makes it moderately healthy for now, with a potential future downgrade if they cannot improve profitability while maintaining debt.
  • Liquidity: StoneCo has substantial cash reserves, which is adequate for current operations. However, these cash levels may fluctuate depending on investments and acquisitions. Their most recent quarterly cash balances are R$2.6 billion, which has fallen slightly from previous numbers.
  • Solvency: Current Ratio of 1.5x indicates decent ability to pay short-term liabilities using its current assets. However, their debt load may potentially lead to solvency issues in the future.
  • Financial Strength: While their current financials are not the strongest, their business is consistently growing, and they are trying to get better at their pricing and expenses. With these improvements, their financials are likely to improve in the coming quarters.

  • Contingent Liabilities: The ongoing litigation and regulatory risk is present, and the company may have some contingent liabilities related to these issues. But no specific details are available to evaluate potential issues or expenses.

  • Overall, StoneCo has shown decent financials. It is able to service debt, but needs improvement on capital allocation and profitability in the long term to be considered financially healthy.