Shares of the Brazilian fintech StoneCo (STNE +1.45%) have gone on a tear, gaining 75% since the start of 2023. Despite its big run-up, StoneCo is down more than 80% from its all-time high price in early 2021. The company's growth has been notable -- it recently reported its sixth consecutive quarter of profit.
StoneCo has done a good job of working through the credit issues that held it back in recent years. But there are a few things investors should know before scooping up shares of the fintech today.
NASDAQ: STNE
Key Data Points
Brazil's fast-growing fintech
StoneCo provides financial services to small- and medium-sized companies in Brazil. It offers payment solutions, point-of-sales terminals, e-commerce gateways, and mobile payments and has often been compared to Block's Square product.
The company earns money from its electronic payment-processing solutions, where it processes and settles transactions from debit and credit cards or other payment methods. It also earns fees for recurring subscription services, generally monthly, for its automation solutions and close-based solutions, along with interest income on loans it makes.
StoneCo's growth over the years has been stellar. In 2019, its total payment volume (TPV) was 129 billion Brazilian reals ($25.9 billion). Since then, its TPV has grown to R$350 billion, representing a 28% compound annual growth rate over the past four years.
Its solid growth continues, too. Last year, StoneCo increased its client base and total payment volume by 37% and 21%, respectively, year over year, while it went from a net loss of R$526 million in 2022 to a net profit of R$1.6 billion.
Poor credit performance has weighed on the stock in recent years
StoneCo provides merchants with payment solutions but expanded rapidly into lending a few years ago. In the fourth quarter of 2020, the company extended R$1.5 billion in loans, which represented an 812% increase year over year.
This fast-growing part of StoneCo's business hit a wall in 2021 when the Brazilian economy struggled with high interest rates and a slower-than-expected recovery from the pandemic. StoneCo's problem was compounded because it relied on Brazil's national registry data to determine the creditworthiness of borrowers, only to discover that it contained bad data. As a result, the fintech incurred huge losses on its loan portfolio, its net income took a big hit, and its stock price plummeted more than 90%.
STNE Revenue (TTM) data by YCharts.
StoneCo has again started to expand its credit business but is taking more precautions this time. It's taken steps to improve its underwriting, including updating its risk models, enhancing data, slowly rolling out credit models, and evaluating their performance. Today, its credit portfolio is around R$309 million.
The stock comes with some risks
StoneCo is growing quickly, but there are risks investors need to know about. First, the company has seen a significant turnover in senior management since its credit product debacle. Most recently, its founder, André Street, and two others said they would end their terms on the company's board of directors.
Additionally, there has been a slight uptick in non-performing loans. In the fourth quarter, StoneCo's non-performing loans as a share of total loans that are 90 days past due ticked higher from 0.03% to 0.29%. Investors will want to monitor the company's credit portfolio to ensure management has improved upon previous mistakes.
The good news for investors is that experts expect solid growth from Brazil in 2024. According to Deloitte, falling interest rates and a tight labor market should continue to support spending in the country, and "downside risks are unlikely to outweigh the positives in the outlook."
Image source: Getty Images.
Is StoneCo a buy?
According to data from Statista, the total transaction value of digital payments in Brazil is expected to reach $254 billion by 2028, good for a 10.5% compound annual growth rate. StoneCo management expects its TPV to grow by 13% annually through 2027 and adjusted net income by 31% annually over the same period.
Management has its work cut out to achieve its lofty goals by 2027. However, StoneCo has done an excellent job after its credit product disaster a few years ago. The company net income is rising and today, the stock is reasonably priced at about 2.4 times sales and 1.8 times its projected one-year forward sales.
StoneCo is a fast-growing fintech company in the Brazilian market and has done an excellent job of turning things around. This makes it a solid buy for long-term investors who are willing to tolerate the higher risks of investing in the emerging-market growth stock.
