Warren Buffett, the legendary value investor, is all about the long game. He loves picking top-notch companies that are trading at a discount, then reaping the rewards over time. While most investors are familiar with big-name Buffett stocks like Apple (AAPL) and Coca-Cola (KO), one relatively under-the-radar company that has more recently earned Oracle of Omaha's approval is StoneCo Ltd (STNE), a fintech firm focused on the Brazilian market.
The booming Brazilian payments industry is expected to grow by 16.5% annually to hit $200 billion in transactions by 2027. But while the long-term forecasts are encouraging, it hasn't been smooth sailing since Buffett's Berkshire Hathaway (BRK.B) added STNE to its legendary portfolio during the October 2018 IPO.
Since then, a combination of economic challenges in Brazil, regulatory challenges, and rising competition have knocked the stock down by over 68% from its debut pricing - and STNE is off 89% from its all-time highs. As a result, the Brazilian fintech firm has pulled back considerably from those highs around $95, set in February 2021. Now, the shares are up 6.5% on a year-to-date basis, to linger just above $10.
That said, there's something uniquely appealing about scooping up a stock with major growth potential at an even better price than Warren Buffett himself. So, should you consider buying STNE at current levels? Let's take a look.
Why Has STNE Been Falling?
StoneCo provides payment solutions and software for merchants, with a particular focus on small and medium-sized businesses in Latin America. As of the most recent regulatory filings available, Berkshire Hathaway has a 3.4% stake in STNE.
As a fintech player in an emerging market, StoneCo faces some tough challenges. Brazil's economy is on shaky ground, with sluggish GDP growth, double-digit interest rates, and inflation over 5%. This means people might not be spending as much, and growth in payments could falter. On top of that, StoneCo has got some feisty competition to deal with as rival Cielo continues to gun for its customers.
However, unlike their U.S. counterparts, central bankers in Brazil have started to cut rates - which could bode well for finance firms with exposure to the market. Since the start of August, Brazil's key lending rate is down by a full percentage point after two aggressive half-point cuts, and the country's policymakers could continue to ease as inflationary pressures subside.
StoneCo: Strong Earnings Performance
With a market cap of $3.16 billion, StoneCo boasts superior technology, lower fees, and higher take rates than its rivals. STNE has also expanded into new segments, including micro-merchants, small and medium-sized businesses (SMBs), and software-as-a-service (SaaS).
In Q2 2023, STNE reported a 39.4% year-over-year increase in total payment volume (TPV) to $17.6 billion, 50% year-over-year growth in active clients to 1.1 million, $2.76 billion in revenue (up 28.4% YoY), and a net income of $305.4 million (up 162.7% YoY). The company's adjusted EBITDA margin also improved to 50.7% in Q2.
STNE has consistently beaten Wall Street's bottom-line expectations over the past year. Looking ahead, analysts expect earnings growth of 203% in fiscal 2023, followed by 27.8% in fiscal 2024.
STNE Looks Like a Bargain at Current Prices
STNE is trading at bargain prices, based on some key valuation metrics. The price/earnings-to-growth (PEG) ratio of 0.23, price/book (P/B) ratio of 1.16, price/sales (P/S) ratio of 1.43, and price/cash flow (P/CF) ratio of 6.83 are all well below the median sector readings, suggesting the stock is more than fairly priced at current levels.
Analysts are also giving STNE a nod of approval. The shares have an average rating of “moderate buy” from 10 analysts, including 5 “strong buy” and 5 “hold” ratings.
And here's the kicker: the average price target of $15.82 suggests that STNE could offer a solid 57% upside potential from its current price. So, for the long-term investor hunting for a value-priced stock with outsized growth potential, STNE seems like a solid pick.
Takeaway
While the underperformance in STNE might seem like an unusual misstep from Warren Buffett, the stock still seems to check a lot of the investor's usual boxes. He likes companies with strong earnings and balance sheets, impressive growth potential, and attractive valuations.
Despite lingering macroeconomic hurdles, StoneCo's got a strong hand to play, with solid fundamentals and a growth outlook that could outperform. Plus, Buffett's backing is a powerful stamp of approval, and it could draw more eyes to StoneCo's potential.
Overall, the Brazilian fintech looks well-positioned to ride the wave of the growing payments industry, particularly as monetary policy in the nation eases up. So, if you're looking for a low-priced Buffett stock with promise, StoneCo's worth keeping an eye on.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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