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StoneCo Inc. (NASDAQ: STNE) Stock Analysis

Updated: Aug 4, 2020




Current price: $43.15


Market cap: 11.96B


Overall assessment: HOLD

Hold until the price drops to $32-35 range or until company issues strong forecast.

Why did it pique my interest?


  1. STNE is a Brazilian clone of Square (NYSE: SQ). From the start of its operations Square price grew 7-8 times in 3 years. Wonder if StoneCo can do something similar.

  2. Backed up by Warren Buffet (at least last year).

  3. Currently trying to breakout to a new 1-year high.

  4. The company has exceptional growth metrics, with revenue growth averaging 66% in the past four quarters.

  5. Yahoo Finance had STNE on their list of 7 stocks that can double in 2020. Source: https://finance.yahoo.com/news/7-stocks-buy-could-double-162150879.html

  6. A bullish recent article on seekingalpha.com here: https://seekingalpha.com/article/4317729-stoneco-facilitating-e-commerce-in-brazil


However, the stock is beginning to get expensive at a price-to-earnings multiple of 68. With the stock hitting year high, let’s examine it in more detail.





Overview: company & category description


As stated above, StoneCo is a clone of Square.

StoneCo engages in the provision of financial technology solutions. It caters to merchants and partners that conduct electronic commerce across in-store, online, and mobile channels. It offers a cloud-based technology platform, electronic payments, and automation of business processes at the point-of-sale. The company was founded on March 11, 2014 and is headquartered in São Paulo, Brazil.


StoneCo stock did see a significant plunge in April, with its share price declining 30% in the month due in part to news that Rede, Itau Unibanco Holding SA's card-processing unit, would start distributing payments to small and medium-sized businesses in just two days after charges were received. StoneCo's April slump was likely also worsened by the announcement of a new share offering. However, the company's share price bounced back thanks to a series of strong earnings reports, and it's now close to the lifetime high that it hit in March.
Shares of StoneCo (NASDAQ:STNE) climbed 116.3% in 2019, according to data from S&P Global Market Intelligence. The Brazilian payment-processing company's stock posted dramatic growth early in the year as it benefited from market momentum and glowing analyst coverage and then got a huge boost thanks to better-than-expected fourth-quarter 2018 results and forward guidance.

Financial overview

To start, below are STNE’s earnings per share (reported and estimated for the next few quarters. Looking good. EPS expected to increase from $0.17 to $0.27 in Q3’20, which is a 58% increase. Full 2021 EPS consensus estimate is $1.41 with high estimate of $1.55 and low $1.28.



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In addition, STNE is reporting a solid growth of its client base who will remain adding to financial stability of the company.

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Key financial ratings/Stock Value


At the current price of $43.15 and an annual EPS of $0.63, the stock is overpriced with P/E ratio of 68. Looking at the estimated EPS for 2020 ($1.03) and 2021 ($1.41), its P/E ratio at current price will be 42 for 2020 and 31 for 2021. This is still quite high. Now, let’s see if company growth is enough to lure in investors at this price. Let’s check STNE’s Price-to-Earnings-Growth (PEG) ratio. The company is expected to grow earnings by 45% in 2020 and 36-40% in 2021. The average expected growth per annum based on my calculations is about 42%. The PEG is then

68 (current PE) / 42 (expected growth rate) = 1.61

Taking PE for 2020 (42) the PEG is exactly 1, which is in line with suggested PEG.

Usually, a ratio below 1 is considered to be good as the stock is said to be undervalued. PEG ratio above 1 may imply the stock is overpriced. This is likely the reason for the price, after pretty much full year of steady growth, bouncing off the rejection level recently, which was its 1-year high. Looking at the above scores it is likely best to wait until the price lowers to around $32-35 or watch the earnings reports/change in estimates to see if STNE strongly beats expectations or raises its outlook to a new level.


Information about projected STNE EPS can be found here: https://www.nasdaq.com/market-activity/stocks/stne/earnings


Please note forward PE and PEG will differ on different websites depending on growth assumptions. For example, Zacks.com estimates currently year earnings of $1.03 and projects growth of 53% in the next 3-5 years, which reduces PEG to 0.82. It is best to always calculate your own ratios to make sure you use correct assumptions and most up-to-date information.


Also, at the current price, market cap for STNE is $12B. Comparing this to $30B for Square (SQ) the question is, how much more growth is left. Understanding SQ is also growing, but it also operates in a much larger and more established market of the USA. So, if SQ market cap is $30B, how much growth can we expect from STNE?


Financial stability/ability to pay debts are OK.

The company is doing very well on margins, meaning the costs to revenue ratios are strong; it can make good profit with increased revenue.



Ratings by analysts


While Zack’s gives a 3 to like 90% of all stocks, I still check that score in addition to others. It is a 3 with not so great scores.


Compilation of recommendations from analysts on MarketWatch provides a different picture with 7 analysts saying Buy (+2 vs. 3 months ago), 6 rating it a Hold (+1), and 2 saying Sell (+1). The overall consensus is Overweight which is moderate Buy or a score of 4 out of 5 if you want to put it that way.


Finviz has the following summary for analyst recommendations with 7 buys, 2 holds, and 1 sell over the past 12 months. Recent 5 recommendations are all Buy.



Who owns it? Changes in ownership


With 178 funds or investment companies owning some stake totaling ~71% of all outstanding STNE shares, it is hard to find a fund/investment company that does not own this stock.

The interest in this stock also increased in the past quarter with 55 new positions and 29 funds/investment companies who sold out. While this metric does not provide insight whether it is a good time to buy now, at least we know the company gets a lot of attention and when it posts good earnings those will not go unnoticed.



Buzz (StockTwits, Investment boards)


Message volume on StockTwits is 87 per month which actually small. Compare that to almost 1000 twits per month for SQ. Sentiment is largely positive at 89.4%.


STNE is non-existent on InvestorsHub with just 7 posts in 2019 and 5 followers.


Summary: Overall, not too much knowledge/interest from public likely due to country of operation.



Risks


We already discussed above the risk of price drifting south as it seems to have failed to breakout above year high. The price approached the high at low levels, the bounce from the line was quite substantial showing the stock is likely going to continue to decline.

In addition, there are some articles on the web raising red flags as they think STNE stock is overpriced such as below:


In addition, there are other risks such as risk of competition. There was news about competition from large local banks in Brazil to StoneCo with their own platforms attacking StoneCo. That news caused a big drop in STNE stock at the beginning of 2019. However, they were around a year ago and STNE was able to show steady growth since then. After all, we have seen multiple times how large banks try to reinvent themselves, play in the cool and sexy innovation area, but usually they fail due to them being 2 steps behind.


Lastly, the company is in Brazil, so if you do decide to invest in STNE, make sure to follow political situation in the country.



Overall assessment and summary


Overall, I like this stock a lot as it is tech-related. Also, it is in Brazil which is a growing market only that is adopting paypal, online payments, etc. at a very fast pace.


However, the stock was running for the full year gaining over 100% and reaching very high PE and PEG scores. There will be investors who are likely going to take gains.

With that, I will hold to see if the stock drops to $32-35 range before buying a small stake.

For now, my rating is: Hold


You have a different opinion about this stock? I made an error in assumptions? You have additional information to share? Please leave your comments below.


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