Research Journal: Stone Co.
Brazilian FinTech Making a Strategic Shift
This is a research journal post and an insight into my investment research process. While this post should include much of what is typical in a company deep dive, it will be a less refined view into what I look at on a more regular basis. I would love to hear your thoughts about it. Also, my Portfolio Review Part 2 will be out in the coming days.
Thesis:
Stone Co (STNE) is Brazil fintech focusing on micro, small, medium businesses (MSMBs) through payment platform + expanding banking and credit solutions, sticky financial eco-system for MSMBs. The stock is significantly down from 2021 highs due to failed credit program and bad capital allocation. The new CEO (2023) has written off bad investments, sold off, divesting non-core software business for >20% current market cap. Linx, the business line being sold, accounted for 8% revenue and 5% net income. New strategy: buybacks. STNE’s buyback yield is currently >10%. Company guides to return all excess capital to shareholders. Credit offering relaunched w/ fixes off previous lessons. Company has 44% YoY adj eps and is guiding for 30% CAGR through 2027. Continued operations expect Return on Equity >30%.
Investment play here is: EPS CAGR + buy backs + a multiple re-rate provides opportunity for strong returns.
A Failed Credit Experiment, Re-Launched
What concerned me initially that required me to dig was trying to determine what caused the companies stock price to plummet in 2021/22. Stone describes it as the “perfect storm” of macro issues, credit issues, and an investment write downs. The company was previously very growth ‘at all costs’ focused and made what turned out to be bad investments and bad credit expansion decisions. Their big investment in Banco Inter was written down in 2021 and eventually closed out in 2023 to focus on their core. Their Credit business line was also paused in 2021. Linx + other software lines of business are being sold off, and management is focusing on massive buybacks - all of this is the type of capital allocation pivot and focus I like to see.
My big concern however was that credit is a big growth factor for the company right now. What is different now than in 2021? In 2020 they were showing 1-2% NPL (non paying loans) rates and suddenly it was 50% and the business was closed. (Note over 100% of credit funds were eventually recovered.) That’s not pretty. Apparently, a lot has changed though. Back then Credit payback was focused on tacking a ‘credit payment fee’ onto POS (payment terminals) transactions so that as their client used the POS they paid back the credit... well creative customers just bought different POSs to avoid payback, gaming the system.
That is no longer the case…
