What happened
Shares of Brazil's digital payments technologist StoneCo (STNE 4.54%) sank 34% Wednesday as of 12:40 p.m. ET. The steep tumble comes following the third-quarter earnings update. Revenue of 1.47 billion Brazilian reais ($270 million) was up 57% year over year, but the fintech company reported a 1.26 billion reais ($230 million) net loss due to a write-down on fair value of investments. Excluding non-cash items, adjusted net income in Q3 was positive 133 million reais ($24.1 million).
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So what
Stone's investment write-down is due to its investment in Banco Inter. In the second quarter of this year, Stone invested a 4.99% stake in the digital lender as part of a plan to woo over the bank's customers to the StoneCo payments platform. A non-cash investment gain of 841 million reais ($154 million) was logged in that quarter, but the investment turned against Stone in Q3 as Brazil's economy struggled and Banco Inter stock tanked. The Q3 non-cash loss on investment was 1.34 billion reais ($240 million).
Additionally, StoneCo had also paused its small- and mid-sized business credit product, and the loss of that income in Q3 also weighed. As good loans are repaid by borrowers, Stone's loans are increasingly skewing toward those in default. Ongoing hardship from the pandemic, which has hit Brazil especially hard, is causing shareholder angst as StoneCo experiments with new digital finance products and integrates the financial software assets from its recent acquisition of fellow Brazilian tech disruptor Linx.
Now what
The road to recovery could be tenuous for Stone stock. Brazil's economy could be headed back into recession. Latin America's largest country has been struggling with high unemployment as well as double-digit percentage inflation. Early estimates from the central bank's economists indicate Brazil's economic growth will be sluggish at best in 2022.
Stone continues to grow at a rapid pace, though. Active payment customers increased 111% to 1.39 million as of the end of the third quarter. The company continues to invest heavily to attract merchants to its platform and made another investment in Gyra+, a small fintech company that specializes in loans to small businesses. Though Stone stock has fallen on hard times as of late (shares are down 68% in 2021 as of this writing), the business itself continues to expand and is still on solid footing.
Nevertheless, this digital payments platform has a lot going on, and a rocky Brazilian economy puts Stone in treacherous seas. I expect Stone to be just fine and to eventually bounce back, but this has always been a high-risk but potentially high-reward investment. For many investors, this stock could be filed away under the "too hard" category.
