StoneCo (STNE) is one of the largest Fintech players in Brazil. The company has reached a powerful inflection point in both its business model and its stock price.
STNE is our largest position exiting the week. We see $16-$16.50 by year-end, $20+ by next summer.
Before explaining why, first, some backdrop.
After IPO’ing in 2018, during Covid, STNE became a market darling with various digital payment companies going nuts back then. These guys broke a lot of hearts though in 2021 and 2022, with its previous management team failing to proactively raise prices as inflation soared in Brazil.
The company also flubbed its first foray into credit, where it experienced heavy losses.
Disaster:
In early 2022, a turning point was at hand. The company admitted it had screwed up and vowed to get religion by consistently improving all facets of its business.
With the company able to raise prices, STNE’s take-rate increased. This created a positive flywheel effect in 2022, with even more demonstrable progress on both the top-line and, even more so, on the underlying profitability and cash-flow inflections, which manifested sequentially throughout 2023:
Q3 was another barn burner: +227% Adjust EBIT YoY growth & +301% Adjusted Net Income YoY too:
A few days later STNE hosted an Investor Day and surprised the Street with a very robust 4-year forward outlook.
While 13% CAGR on TPV growth is not sexy, forecasting a 31% CAGR in Adjusted Net Income Growth from 2024-2027 – which was 3X higher analyst forecasts – was a big surprise and bodes very bullishly.
Rough math suggests $2.50 in 2027 EPS power.
Will they end up doing $3 instead?
After basing for the better part of 2022 and then vacillating between $8.50-$9.50 and $14-$14.83 in ‘23, STNE rocketed higher this week. It looks ready to bust out of this gorgeous two-year weekly formation:
We think Stone can earn $1.30 in 2024.
Remember, after printing a $0.26 quarter, STNE may exit 2023 at a $1.20 run-rate if they post a $0.30 quarter.
So, even $1.30 next year may prove conservative.
2025 numbers also look too low. Is $1.70’ish doable in ’25? We think so:
While valuations on payment companies have negatively inflected the past few years, STNE’s $4.3B current market cap is still undervalued and does not reflect the impressive progress achieved the past 7 quarters, not to mention the bright future poised to manifest in the years ahead. That’s only 1.5x P/S on ’25 estimates. A re-rate to a 2.5x P/S seems appropriate. That gets us 60% upside here.
Yes, the stock ran up last week. A lot. But that’s what the best inflection points do. Their stocks go up once the inflection points have been identified and confirmed, ushering in a host of new institutional investors into the name. We see $20 as the first intermediate-term target on the monthly:
Naturally, the question begs, how does STNE get to $2.50-$3 by 2027?
And, how realistic is that?
We think their long-term plan is a viable one.
STNE is following THE TOP recipe for the best long-term inflections by layering in multiple new product lines the past 3-4 years, transforming itself quietly from just a payments company to a very diversified Fintech company with extended reach into various verticals, which will translate into a new level of underlying profitability metrics, potentially, WELL ABOVE forward consensus:
Note how 88% of its new customers are onboarding with BOTH a Payments and Banking bundle:
By bundling its financial software products with its payments vertical, software should be a big driver of growth the next few years:
Since coming public, upselling new products from new verticals like software has allowed STNE to increase its TAM 8x.
Impressive:
A key point of consideration: There is tremendous, embedded potential to scale into a much larger company simply by maximizing its current customer base:
Of note, STNE began ramping up its credit offering in Q3.
The company failed here once before.
No guarantee they get Credit 2.0 right.
Thus far, they are off to a good start, with Q3 credit revenues contributions well above those seen in Q2:
STNE has done a great job at de-emphasizing low margin key accounts while adding Small-business accounts at a quickening pace. StoneCo is gaining share:
As these new small business accounts keep getting added, the positive flywheel inflection at hand should accelerate, with each new account inherently more profitable when they onboard with multiple product lines:
Another consideration on StoneCo is its Emerging Market profile. These stocks do well when the dollar is moving lower.
Remember, on the way to Recessionville, you will pass through Goldilocks, a period of slowing growth where inflation is moving lower, and the Fed looks much smarter than they are.
Currently, equities are loving the slow down in the economy and the drop in the dollar, where a long-term top is in place (1st half of 2024 may be another story however, for equities, depending on the timing/magnitude of any such recession):
I like how MELI broke out this week. That’s a nice positive, having new leadership already in place within emerging markets. This paves the way for new blood to move into STNE, with Big Guys looking for the next MELI:
With the long-term top in for both the dollar and long-term rates looking very likely, STNE is an excellent way to get levered to an asset class that has been dead since the Fed started jacking up rates. The re-rating has only begun. In time, PTs will ratchet up further into the $20s the next 1-2 quarters. For now, only 3 PT’s are above $20:
If the multiple expands to a 15x P/E in the next few quarters, a move in STNE to $20 would take shape.
That’s a long way off though.
For now, we plan to continue sizing STNE on dips. We have been waiting for $14-$15 to be taken out for the past two years. The company has now reached a powerful inflection point. The group is inflecting too, and STNE is still quite attractive even after its move up last week. Most importantly, STNE is very de-risked in the near-term (unless some unexpected regulatory risk presents itself from the Brazilian authorities).
For us, $12.80 to $13.65 is the Back-Up-The-Truck zone in STNE next week, which would represent a third retracement of its recent leg-up and bring us back into a very powerful Volume-Support zone, where the Risk-Reward zone will be skewed heavily in favor of the potential upside PT zone, relative to our stop loss point of $11.95.
We attach 80% odds this trade works well into year-end and into the first half of 2024 too. A wide stop for a new market leader seems appropriate with a 4-to-1 reward to risk ratio in our buy zone next week. It’s a trade we would do every day of the week. What about you?
Note the massive buying the past six sessions:
Considering there are 6X more institutional owners of MELI…:
Relative to STNE’s paltry institutional footprint:
Odds therefore heavily favor this massive buying to continue at incrementally higher prices in the coming days and weeks and quarters. Not too soon, the Big Guys will need to pay up. For now, though, they are bidding on a much bigger size down below in our buy range we believe. Patience and discipline in getting an entry on dips are paramount.
In summary, StoneCo is a top-tier inflection point pick to buy on both weakness and on any move through the late week highs of $14.20.
Not only do we see a strong secondary move taking shape through year-end to $16-$16.50, we also attach 65% odds STNE heads to $20+ by next Spring/early summer.
Longer-term, if the company is successful in beating and raising like they have done throughout 2023, then, at some point, $30-$40 could become part of the conversation late 2024/early 2025.
Calling it there.
Great weekend to all.
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Disclosure: We are long CRDO, PINS, STNE in the accounts we oversee.
Disclaimer: In no shape or manner should the views expressed in this piece be considered investment advice. We reserve the right to change our positioning in these names at a moment’s notice without updating you on any such change in opinion and positioning.
Investors need to consider their investment risk tolerance before investing in the stock market and also before investing in any of the stocks mentioned in this report.
