Oh boy! Stone, ticker symbol S T N E, just dropped another 40% in price after reporting earnings. Its
market cap is now just under 6 billion dollars. I guess you could say it's share price is dropping
like a... rock. It was actually pretty hard to deliver that joke while staying...
stone-faced. The jokes on this channel have just hit... rock bottom. Hey, wait!
So, in this episode, I want to talk about Stone's current stock price and their earnings report to
see whether or not the best stock ever just got even better. Let's start with the stock price.
One of my favorite sayings in investing is: "when in doubt, zoom out". Here's
the entire price history for Stone stone. In October of 2018, Stone IPOed at $24 per share,
or around a 9 billion dollar market cap. That number is important because that's around the
price Warren Buffett's Berkshire Hathaway bought 11% of the company for. Berkshire
spent $340 million to buy 14 million shares of Stone stock. As of the start of this quarter,
Berkshire Hathaway still has 10.7 million of those shares, so he hasn't sold out through the stock's
60% drop from $92 per share in February to $36 at the start of the quarter. The 3 million or
so shares he did sell were sold during the first quarter of this year, for probably north of $70
bucks, or around 3 times what he bought them for. This strategy is called: buy low and sell high.
So, will Warren Buffett sell Stone stock this quarter, or will he buy it now that it's cheaper
than what he paid 3 years ago? All kidding aside, I actually have no idea; I'm right there with you.
But we can turn to another great investor who holds Stone stock and posts their trades daily
instead of quarterly. I'm actually in the middle of revamping my dashboards and I'll have a pretty
exciting update on that for you soon. For now, let's pull up Cathies ARK. Cathie Wood holds Stone
stock in ARKF, ARK Invest's fund themed around Fintech Innovation. Here's every purchase of
Stone shares that Cathie Wood has ever made. She first bought 233,000 shares of Stone on May 4th,
2021. On that date, Stone stock closed at $64 per share. She bought the dip in May,
July, twice in August, twice in September, and of course, the huge dip this past week.
So, that's the situation I've put us in right now: I'm talking about a Fintech company in an emerging
market. A company that Warren Buffett still owns over 7% of that's currently cheaper than
what he bought it for AND much bigger than when he bought it. Cathie Wood has also been loading
up on this stock at MUCH higher prices than it is today. That's the whole reason I made an episode
about Stone stock in the first place; I thought it was a serious opportunity at $36 dollars a share
and, just in case it needs to be said, I obviously think the opportunity is twice as good at half the
price. Speaking of which, let me point out two things about my episode on Stone stock before
I get into their earnings. First, here's how I closed that episode out [quick clip absolutely
absolutely absolutely]. When I made that episode, Stone stock was on a serious downtrend and I
thought I was pretty clear that the trend could continue. Second, that episode is only
1 month old. As in, less than 30 trading days. I actually had to double-check this to make sure.
I've eaten pizzas older than that! Grad school was... pretty rough. Listen. If you're measuring
your time horizon in days instead of years, you are a stock trader, not an investor. I
don't mean that as any sort of insult, [yes I do] that's just not what my channel is about.
This channel focuses on long-term investing in advanced technologies that can take years to
mature and penetrate their target markets IF the companies building them can make it happen at all.
It's not meant for the faint of heart or paper of hand. If that's you, thank you for your time
and for your Stone shares. [unlike, unsub, unbell] As for the rest of us...
Stone reported their quarter 3 earnings on November 16th and the stock crashed by over 33%.
So, let's turn to their latest earnings report, see what they're up to, and update our *long-term*
investment thesis accordingly. Stone is a one-stop shop that provides small and medium-sized
businesses in Brazil the Fintech solutions they need to move away from cash and join the digital
economy. They have 2 types of solutions. Their financial solutions include payment processing
and point of sale devices, as well as financial services like business loans and credit lines.
That makes up about 70% of their total revenue. The other 30% comes from business software
solutions, which they're integrating together with Linx, a financial software company they acquired
late last year. Let's take a look at their growth. M S M B stands for Micromerchants, Small,
and Medium-Sized businesses and T P V stands for total payment volume. So the total payment
volume of their small and medium-sized business is up 70% year over year and it's up almost 2300%
for micro-merchants. That's over 80% total payment volume growth year over year.
If you look at their 2-year compound annual growth, it's at 61%, which is the highest it's
been since they could start reporting that number since they've only been on the market for 3 years.
If we look at the number of accounts instead of transaction volume, they've doubled their client
base over the last year. They added over 27% more NEW small and medium-sized businesses last quarter
than they did a quarter ago and over 7 times as many micro-merchants as this time last year. Said
another way, their rate of growth is increasing year over year, not just their growth itself.
Their financial engagement is also increasing. Their banking client base has 4 Xed in the last
year. Their total accounts balance has more than 3 Xed in the last year. In fact, no matter how
you look at their financial services, like banking and credit lines, they're all growing by hundreds
of percentage points year over year, just like I showed you in my deep dive on the company last
month. There are a lot of important financial platform highlights here. Stone is investing
in a credit platform for S M Bs this quarter. I'm excited to learn more about this insurance
solution that's going to collect additional fees with no underwriting risk. And of course,
we need to keep an eye out on their partially- and fully-collateralized loan products since that's
a big reason their stock has been dropping in the first place. I'll come back to that.
When it comes to Fintech companies, one thing we really care about is keeping customer acquisition
costs under control because this is one of their competitive edges over big banks. Big banks have
big buildings with high costs and run expensive marketing campaigns that include lots of paper
mailers. Those costs get divided up among the customers they acquire. So, it's great to see
that Stone is keeping their customer acquisition costs under control; they're up just 1% year over
year for small and medium-sized businesses and down by 17% for micro-merchants. Not only that,
but they're better at monetizing each client they do acquire. Average revenue per user is
up 3% for SMBs and almost a whopping 250% for micro-merchants. More clients times
more revenue per client is how Stone is achieving exponential growth on the financial services side.
Stone's financial software side is looking pretty good as well, especially considering
how recent their acquisition of Linx is. Consolidated software revenue grew by 27%
compared to their independent software revenues last year before the acquisition. Stone's point of
sale and enterprise resource planning software revenues have almost tripled year over year,
while Linx's recurring revenues are up about 15% year over year. So one thing we want to see as
investors is more improvements on the Linx side of things as Stone continues to integrate this new
acquisition into their core business. That's fine; still early innings for this acquisition. There
are lots of features that Stone wants to implement across a wide variety of verticals like beauty,
pet care, apparel, and gas. This presentation is full of slides where Stone covers each individual
aspect of the business, how they impact their clients, and exactly what their strategy is
moving forward. I'll leave a link to it in the description below and I can't recommend it enough.
Okay, let's dig into their financials. Total payment volume is up over 50% year over year
when you exclude their corona-voucher program. Like the pandemic itself, we want to see this
part of their business get smaller and smaller over time and the company to be more and more
successful without it, so this is great. Total revenue is up over 50% year over year. One of the
big reasons I think Warren Buffett and Berkshire Hathaway invested so aggressively in Stone is
because they're the biggest merchant acquirer in Brazil besides the big banks. A merchant acquirer
is a financial institution that maintains that merchant's account, enabling them to accept credit
cards and settles credit transactions on their behalf. During the first wave of the pandemic,
when people started to handle more transactions digitally instead of with cash, 51% of Brazilian
e-commerce volume went through Stone’s platform. That's what caused their market share to spike.
Now, Stone is continuing to gain more and more market share without their coronavoucher program.
This is real, stable, non-pandemic related growth and it's accelerating.
Okay, before I cover why the stock is dropping like a rock, comment below or tweet me at ticker
symbol you with your thoughts on Stone's latest quarterly report. If you caught my episode on
Stone, has anything I've said so far meaningfully changed your investment thesis on the company? I'm
excited to hear your thoughts. If you haven't checked out my deep dive on Stone but you like
what you're seeing so far, I encourage you to check it out. I cover what the company
actually does in way more detail. I'll leave a link to that episode in the top
right-hand corner of your screen right now and in the description below as well.
Okay, so here are the 4 things dropping causing Stone's stock price to drop like a... stone?
First up, Stone bought a 5% stake in Banco Inter so they could bring the bank's customers onto
their platform. Brazil's economy is struggling and Banco Inter stock tanked. So, the fair value
adjustment on these shares went down. In my understanding, this value adjustment shows up
as a loss to Stone just like Stone is showing a loss in our portfolio -- it's unrealized. Stone
isn't selling Banco Inter's stock low, they're just updating what it's worth compared to what
they paid. This is by far the biggest loss on their income statement. Second, if we look at
their adjusted free cash flow, we can see their pre-payment cash needs are still very high.
This is because Stone's new credit and loan solutions over-relied on Brazil's new collateral
registry system, which is something I talked about in that deep dive. Basically, merchants have to
put up a certain amount of collateral to get a business loan or credit line. That collateral is
registered with one of a few registries in Brazil. So, this registry isn't something Stone built,
it's a new collateral system that they have to integrate with and keep up with as it changes.
Due to a malfunction in these registries of receivables, merchants could put up collateral
with Stone, then go apply somewhere else for financing and reuse that same collateral, because
these registries don't talk to each other. So, one thing Stone is doing to protect themselves is
putting more cash aside for these non-performing loans. While this isn't Stone's fault, it
definitely is their problem and as investors, we need to see them fix it, either by finding a way
to rely less on Brazil's faulty credit registry or cutting their collateralized credit products
altogether. This is something I'm watching out for in MercadoLibre's future reports as well
because Mercado Libre also reported a high amount of non-performing loans.
Third, they're aggressively reinvesting in their future growth through mergers,
acquisitions, and other investing activities. In my opinion, this is a good thing because this is
what high-growth companies do in general and how Stone is positioning itself to keep claiming more
and more market share. Still, I definitely hope these activities work out better than their stake
in Banco Inter, at least on paper. We have yet to see how their actual relationship with the bank
works out in practice. The fourth and final thing is pretty close to home. Well, my home at least.
As it turns out, on October 26th, U.S. federal investigators raided the Florida offices of PAX
Global Technology, a Chinese provider of point-of-sale devices used by millions of
businesses and retailers, including PagSecuro and Stone. The FBI began investigating PAX
after a major U.S. payment processor started asking questions about unusual network packets
originating from the PAX's payment terminals. PAX has since issued a statement saying the network
traffic is due to “the optional geolocation feature available on PAX terminals,” and “the
use of dynamic IP addresses, commonly used for geolocation" just like in a smartphone.
This FBI raid is what spurred Viceroy research to take a short position and release a massive
uh... 1-page short report the next day. You know what I always say about short reports;
the better the timing, the worse the report. This is also what spurred the investigation into Stone
by Bragar Eagel & Squire. B E S is a stockholder rights law firm and is investigating potential
claims against Stone on behalf of stockholders to make sure they didn't do anything unlawful
because that would be bad for shareholders. I actually think that's a pretty fair thing to
do. Ironically, the news of this investigation appears to be putting more downward pressure on
the stock than it's helping Stone's shareholders. Here are all the investigations that B E S
would like to remind investors of and they encourage them to contact the firm.
In my opinion, the only issues that concern me is Stone's integration with Brazil's collateral
registry and the money they're investing in future growth. Those are the real issues materially
damaging their balance sheet today and we want to make sure the benefits outweigh the costs into
the future. When I say into the future, I mean a couple of years from now, not a couple of weeks.
I like what I saw in their most recent earnings report, I'm excited to see if Warren Buffett buys
back in, and I'm happily joining Cathie Wood in buying this dip myself. Whether you buy
the stock or not, I hope this episode cleared up what's going on with Stone after their most
recent earnings call as well as with all the drama on the side. If it did, and your hands
aren't made of paper, consider investing in the like button and subscribing to the channel with
all notifications turned on. That's a great way to invest in the channel that invests in you.
Thanks for watching and until next time, this is Ticker Symbol You.
My name is Alex, reminding you that the best investment you can make... is in you.