stoneco is a high-growth stock that is owned by both warren buffett and Cathie Wood yet this
company has been a disaster so far for investors and it's currently down more than 80% since its
ipo what does this company do and could it be in value territory today here's everything you need
to know about stoneco in a few minutes my name is Brian Feroldi and my name is Brian Stoffel
as of the time this recording neither briar and i own shares in stoneco brian stoneco right now
is a $3.4 billion dollar company trades under the ticker s-t-n-e stoneco's mission statement is to
remain focused on empowering our clients to grow their businesses and help them conduct commerce
and run their operations more effectively we don't think this is an inspiring mission statement at
all and it's a bit wordy although it's possible this could be a bit of a run-on sentence simply
because this company operates in brazil and we're reading this in english so what does stoneco do
this is a fintech company that operates in brazil it has hardware that helps micro
small and medium-sized merchants in brazil to run their businesses
like point-of-sales devices or even cards but they also offer a whole suite of tools that
you can use to help run your business stoneco can help with things like checkout qr codes
hardware terminals fraud handling bank account balances peer-to-peer transfer and a lot more the
company really tries to make it easy for small businesses to handle all of their fintech needs
stoneco's business model is a hybrid it offers software and financial services it even offers
some lending to clients as well as of the most recent year the bulk of this company's revenue
comes from financial services and about 18% percent comes from software sales one thing that
really impressed us was stoneco's medium level of customer acquisition costs the company does this
by setting up things it calls stone hubs these are physical locations within brazilian communities
where merchants can go to learn more about what stoneco offers small and medium-sized
merchants in brazil are not in the same place that many north americans might be used to
and the ability to go and talk with someone face to face about how to use this technology
is a major differentiator meanwhile collecting and accepting payments is a mission critical operation
for any business for that reason we think that stonesco's business is highly recession resistant
and given the combination of subscription revenue and revenue based on transactions
the vast majority of this company's sales are recurring turning to competitive advantage we
think this company drives its moat primarily from its high switching cost once a business gets set
up and operating using the stone coast system it's hard for them to switch away to something else
given that they offer financial services and software next we want to give stonecold credit
for its brand value as well it is clearly the top dog within brazil when it comes to this type of
fintech solution you could also make the argument that stoneco's focus on the stone hubs gives it
a unique marketing advantage with its competitors which could lead to counter positioning add those
things together and it's pretty clear to us that the moat is widening around this business turning
to financial statements the results here are mixed on the one hand this has been a top line growth
story and from that front top line growth has been very strong coming in at 38% over the last three
years when we reviewed the company we were also pleasantly surprised to see that gross margins for
this type of business are north of 60 and prior to 2021 this company had a history of posting
positive net income however that took a big turn for the worse in 2021 due to the company's credit
division speaking of that credit division it is something that is really important to understand
two forces are working against stoneco right now the first is that inflation is quite high
in brazil having spiked over the past year but the second is that the way that merchants are paid by
the card processors has changed over the past year which has adversely affected stonko's business
if you look at the chart here it shows that the portfolio that's outstanding for stoneco's credit
is about equal to the fair value on the balance sheet as early as the first quarter of 2021. as
time has progressed the fair value of those loans have shrunk in fact today they are less than 50
of the outstanding balance in other words the company is preparing to not be able to collect
all the money that it thought it could from the loans it made to its merchants the losses
that it's had to take on its credit facilities which is when stoneco allows its customers to
borrow money to fund their operations has been a major reason that this stock is down big and the
company was formally profitable and now it's not now one bit of good news is that while that did
drag down free cash flow which had been positive in 2020 it didn't drag it down in a form that was
absolutely debilitating losing just 46 million dollars is something the company can recover from
stonko's balance sheep is also an okay shape with nearly 1.4 billion dollars in cash
compared to just 1.3 billion dollars in debt and while returns on capital had been positive
before last year that credit portfolio is to blame on it being negative today
turning to the management team one of stoneco's founders andre street is still involved in the
business operating on the company's board of directors and it's worth noting that there's been
quite a bit of a shake-up in the c-suite thiago piau is now the ceo of the company but eduardo
pontes a co-founder with street recently left the board of directors and many of the executives
are brand new to their positions yeah a lot of the management changes have come just within
the last six weeks and that's definitely a risk for investors to watch another one is that when
it comes to glassdoor ratings we couldn't find essentially any information about this company
so we have no idea if this is a good place to work for employees or not on the other hand
we are heartened by the fact that about 38 of the company is owned by insider street being a primary
one and their stake is worth over 1.3 billion dollars turning to potential we were heartened
to see that the company has lots of optionality it has rolled out lots of new products and services
some of which were made by acquisition that allows it to sell its customers more and more
services over time now we pointed out that this company used to be profitable but over the past
year it switched to not being profitable there's a lot of room for operating leverage to increase
especially once the credit portfolio gets squared away now stonecold believes that it's
just a market opportunity is somewhere around 26 billion dollars please keep in mind that figure
actually includes the local credit business what the company is actively pulling away from
it's possible that that number is dramatically overstating the company's opportunity but the
market for the services in brazil is large and it is continuing to grow over time and it's worth
noting that some of this growth is organic stoneco did make a big acquisition of links last year
which adds significantly to the company's software sales so how is this company done for investors so
far the answer there is pretty horrific shares have drastically underperformed the market
and in the last four quarters the company has missed on the bottom line three times given
everything we've covered it should be no surprise that right now stoneco isn't giving money back to
shareholders through buybacks step paydowns or dividends so what risks should investors watch
first and foremost is competition stoneco appears to be the runaway leader in the fintech space in
brazil but there are plenty of fintech companies that are chasing this market it's also definitely
worth noting that it is very difficult to get through all the company's financials when brian
and i review companies it normally takes us about 50 minutes to do so and we ran over 80 minutes and
just trying to figure out how this business works another risk to keep in mind is geopolitical there
are currency considerations as well as just the risk that comes along with investing in emerging
markets such as brazil going hand in hand with that is the fact that there are outside forces
that can play tricks on the company the changing of the regulations for that credit portfolio and
the interest rates going above nine percent have wreaked havoc on the credit portfolio but when we
look at valuation we see a company that is down significantly from its all-time highs
and notably is trading for about four times sales about six and a half times gross profit
which seems like a pretty good deal so what should investors watch moving forward
first and foremost keep an eye on the company's credit portfolio it's actively pulling back
on that business and once it completes that its net income and cash flow profitability numbers
should soar next simply keep an eye on revenue growth this is an enormous market that stoneco is
moving into and you will be able to tell whether or not they're taking market share based on their
revenue growth third keep an eye on bottom line cash flows we want to see this company return to
producing positive free cash flow and having that number compound over time had this business score
on our investing checklist the answer there is not great on my quality score it got a 55 which
is in my why bother category i think this company has a tremendous amount of potential but it's also
very high risk for investors now my framework it was much the same this company got a six and a
half which is in my fragile category which shows based on how inflation and government decisions
affected the company and its stock overall we view this as a high risk high reward potential
kind of company and we're heartened by the fact that both Warren Buffett and Cathie Wood own it
however for us right now we think it's just too risky to touch enjoy this video let us know in
the comment section below and give us the thumbs up curious how we found out this information
click the link you see on your screen to find the hour long deep dive weed into stoneco brian's out