Warren Buffett has been one of the world's top equity investors for several decades now. Also, known as the Oracle of Omaha, Buffett has managed to consistently outperform the broader markets by successfully identifying companies trading at attractive valuations with solid long-term potential. Here, I analyze one high-flying tech stock in StoneCo that is also part of Berkshire Hathaway’s portfolio.
At the time of writing, StoneCo is valued at a market cap of $10.75 billion. STNE stock went public on the NASDAQ in late 2018 and has since returned just 11% to investors. Comparatively, the S&P 500 has gained close to 67% since StoneCo’s IPO.
StoneCo is a Brazil-based fintech company that provides a wide portfolio of solutions to merchants and integrated partners. Its solutions are distributed via Stone Hubs that offer hyper-local sales and services. Further, tech solutions are provided to digital merchants through sales and technical personnel as well as software vendors. At the end of 2020, StoneCo served 652,600 small and medium businesses and 260 integrated partners that include global payment service providers, digital marketplaces, and integrated software vendors.
STNE stock lost more than 20% in the first half of 2021 and is currently down 63% from all-time highs. It has been severely impacted by the COVID-19 pandemic as several businesses remained shut in Brazil. In the fourth quarter of 2020, its adjusted earnings per share stood at $0.22 which was below Wall Street estimates of $0.22. In Q1, its EPS of $0.11 was again below consensus forecasts of $0.18 per share. In the June quarter, its EPS of $0.09 was significantly below estimates of $0.18.
We can see that StoneCo has consistently missed Wall Street forecasts that have led to its underwhelming performance in 2021.
StoneCo ended Q2 with over 1 million small and medium business accounts. Its total payment volume in these accounts more than doubled year over year. Company CEO Thiago Piau explained, “Despite strong underlying growth in our core business and evolution of our strategic roadmap, we had some mixed results this quarter primarily driven by a challenging short-term scenario in our credit product.”
Brazil has been updating its regulations to accommodate growth in the digital payments space as well as the credit rules surrounding businesses. This amendment in the online credit system coupled with a credit system change led to an 8% decline for StoneCo in this segment. Now, the fintech company has decided to temporarily freeze the credit business possibly until the end of 2021.
StoneCo’s core payments business saw its payment volume rise by 59% year over year. If we exclude credit business sales, revenue was up 68% year over year.
Now, Wall Street expects sales to rise by 29.2% to $819 million in 2021 and by 81.5% to $1.5 billion in 2022. Its adjusted earnings per share are also forecast to improve from $0.63 in 2020 to $1.1 in 2022.
We can see that STNE stock is trading at a forward price to 2022 sales multiple of less than 10x and a price to earnings ratio of 32x which is quite reasonable. Wall Street like me remains bullish on StoneCo with a 12-month average target of $69. StoneCo is currently trading at $34.5.