StoneCo’s Fintech Platform Poised for Growth

StoneCo’s Fintech Platform Poised for Growth

Price $63.47                          Recent Purchase                        June 8, 2021

  • Latin American Fintech with Massive Market Opportunity.
  • Explosive growth over the course of the pandemic.
  • A dominant force in Brazil.
  • Revenues made up of fees from customers.
  • Vertically integrated, from banking to sales to logistics.

Investment Thesis

StoneCo (STNE) is a fintech company that provides electronic payment services, neobanking (digital bank), and data analytics to over 650,000 customers in 1,500 different cities across Brazil. Brazil is one of the fastest-growing emerging markets in the world with a large population of 211 million, and STNE powers much of it. They offer competitive fees and a remarkably simple and portable solution for all sizes of business. The near-ubiquitous nature of smart-phones in Brazil makes StoneCo’s model with smartphone integration essential for small businesses to transact and grow. StoneCo has incredible growth, even with COVID-19 restrictions and new variants ravaging Brazil. Additionally, they have managed to purchase or enter partnerships with competitors to retain their edge. We believe that over the next 5 years STNE could prove to be an excellent growth stock for aggressive investors.

What is StoneCo?

StoneCo (STNE) is a fintech company that provides business-centric services. STNE primarily targets vertically integrative solutions for small-to-medium-sized businesses. This allows these relatively small firms access to things like a business credit card, loans, sales data, marketplace services, and logistics. They allow small business owners to increase the services they use as they grow.

StoneCo is pioneering its “financial operating system” which currently operates at the point of sale (PoS). With recent acquisitions and partnerships, they hope to cement themselves further as a critical business component for hundreds of thousands of business owners across Brazil.

StoneCo Q1 2021 Earnings

Expansion and Acquisition

Recently, StoneCo was approved to purchase Linx, one of the largest Brazilian management software firms (45.6% market share). Linx currently provides inventory management solutions, on top of payment processing, online order processing, and other overlapping services. This acquisition will allow STNE to add inventory management to its repertoire. Linx’s existing customer base will be gradually integrated into StoneCo’s, and StoneCo will assume operating responsibility. STNE has entered a partnership with Banco Inter, a Brazilian digital bank (neobank). StoneCo will invest around $500 million into Banco Inter, in exchange for integration of Banco Inter’s services into STNE. Banco Inter operates a digital banking system, with 10 million customers. Banco Inter has an incredible 30,000 new accounts made every day and 100% yearly customer growth. Its services include insurance, e-commerce, investments, credit, and traditional depository services. With the fast development of Brazil’s economic and technological infrastructure, services like Banco Inter have become increasingly popular. STNE and Banco Inter have an opportunity to escape the bureaucratic nature of banking that has alienated customers and depositors in Brazil.

StoneCo Q1 2021 Earnings

Management’s strategy is to continue this path, acquiring and entering partnerships with more POS/ERP businesses. Seeking to build a complete financial ecosystem, they have already expanded their workforce across all divisions. 24% to the sales team, 33% to marketing, 20% to technology, and logistics by 32%.  

Risk

Revenues for StoneCo are seasonal to consumer spending patterns. STNE makes money from fees associated with sales volumes. Customers tend to spend more during the final quarter during the holiday season, where it then decelerates going into Q1. COVID-19 has further impacted seasonal downturns in Q1, with heavy restrictions in traditional Brazilian retail.

While the market for neobanking remains relatively unregulated across the globe, one of the primary risks facing StoneCo and its partners is regulatory. Should banking services like Banco Inter or StoneCo’s financial services component be subject to further regulation or licensing, they may lose that component of their operation.

Metrics

Aside from the employee expansions, STNE has a very strong growth rate. They grew their small business customer base by 67% versus the previous year, with overall revenue growing 45%. While lockdowns did adversely affect this (as their revenue comes directly from the profits of stores), they have a two-year CAGR of 42%.

2021 Estimated

StoneCo

Worldline

Nexi

FleetCor

Price-to-Earnings

71.3

32.7

40.6

20.1

Price-to-Sales

19.8

4.4

15.4

7.9

Market Cap (Billions $)

20.02

22.54

19.1

21.1

Sales (Millions $)

1,010.8

6,016.2

1,471.2

2,664

Source: Bloomberg

STNE has managed to massively increase its net margin to 18.2% and has quickly propelled itself to the top of the competitors list in Brazil. Currently, their Price-to-Earnings remain high, but they have explosive growth that makes us believe their vision can work. 

StoneCo

E2021

E2022

E2023

Price-to-Sales

19.8

12.9

10.5

Price-to-Earnings

71.3

41.8

32.3

EV/EBITDA

45.9

26.24

23.1

Source: Bloomberg

What is Neobanking?

Neobanking is remarkably similar to normal banking. Neobanks offer loans, deposits, transfers, and even savings like any other bank – most even use a traditional bank as a custodian for accounts. However, neobanks are only online – they do not operate physical branch locations, and many do not have a banking charter (thus the name). Neobanks tend to offer lower fees, and access to many traditional banking services without needing to go to a physical branch.

While neobanks do exist all over the world, it has emerged in developing markets as a much more trusted alternative to the traditional model. The ubiquity of smartphones in places like Brazil makes neobanks regularly top the charts for customer trust and satisfaction.