by Ian Harvey
December 17, 2020
StoneCo stock continues to climb thanks to positive coverage from analysts after publishing better-than-expected third-quarter results at the end of October displaying strong momentum; combined with bullish sentiment in the broader market.
Stock Options Made Easy “Cut-To-The-Chase”Members are already well positioned to continue profiting from STNE’s growth; already up 284%.
And, “Mentorship Program”Members have just initiated an options trade on STNE and are already seeing a potential profit of 24%.
How high will the stock trade?
Fintech start-up StoneCo, a growth stock, can be viewed as the Square of Brazil; and it's one of Warren Buffett's favorite growth stocks.
Like Square, StoneCo offers financial-technology solutions primarily for small- and medium-sized businesses. Also like its larger U.S. counterpart, the company has built an ecosystem of products and services that prove to be "sticky" for customers.
That ecosystem continues to evolve. StoneCo is developing a financial platform that it thinks will replace merchants' current banking relationships. It's moving all of its products to a fintech-as-a-service platform. The company is also building out a platform that will enable customers to scale up their e-commerce capabilities.
These efforts should give StoneCo a clear path to sustained growth. And while the company currently focuses only on the Brazilian market, it should have opportunities to expand to other countries in Latin America in the future.
Given its massive growth, StoneCo will likely drive solid investor returns, not only by changing the culture of finance in Brazil, but possibly in the rest of Latin America as well.
Brazil, like most countries in Latin America, is primarily a cash-based society. According to a report by McKinsey, a large percentage of the population does not hold a bank account, credit card, or debit card. This presents a challenge in a retailing world moving heavily toward e-commerce platforms that cannot accept cash.
StoneCo Ltd. 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 cloud-based technology platform, electronic payments, and automation of business processes at the point-of-sale.
The company offers fintech solutions in its native Brazil. It provides an ecosystem for merchants and partners to conduct online, mobile or in-store commerce. This is especially challenging for StoneCo as it serves a heavily cash-based society where numerous consumers do not hold a bank account. That said, StoneCo has a competitive, and possibly first-mover, advantage over Visa or PayPal in this region.
StoneCo management says that the company has completely rebounded and returned to its pre-pandemic levels across all of its business units. In August, STNE stock got a boost after the company announced that it is buying retail software firm Linx (NYSE:LINX) in an all-stock deal valued at $1.1 billion. The combined businesses will merge leading hardware, software and services that online and traditional brick-and-mortar stores need and rely on to run their operations.
If it keeps moving higher, it likely won’t be long before StoneCo stock becomes better known among U.S. investors.
Buffett Is A Fan.....
Berkshire bought nearly 14.2 million shares of this stock in late 2018 as it launched its IPO, about 4.4% of the company. StoneCo stock has risen more than 80% since that time.
Despite some slowing due to COVID-19, revenue increased by 39% from year-ago levels in the third quarter (ending Sept. 30), while total payment volume rose by 114% over the same period. This helped to take net income higher by 30% during the quarter. Adjusted free cash flow also surged by more than 600%.
StoneCo stock has posted stellar growth this year, which has had the effect of elevating the company's price-to-sales and price-to-earnings multiples. The company has a market capitalization of roughly $23 billion, and is valued at 36 times this year's expected sales and 121 times expected earnings, reflecting the fact that the company's stock performance will hinge on the business continuing to deliver big growth.
However, the market for payment-processing and enterprise-software services in Brazil and other Latin American markets still has huge room for growth, and the company stands as a top player in these categories.
Moreover, once COVID-19 passes, growth should accelerate as business activity returns to levels seen before the pandemic. In fiscal 2021, analysts forecast that earnings should increase by around 82%.
StoneCo published better-than-expected third-quarter results at the end of October, and bullish sentiment in the broader market combined with favorable analyst coverage helped the fintech company's momentum continue.
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StoneCo's growth potential remains enormous. StoneCo has expressed a goal of becoming a one-stop-shop for fintech, much like Square in parts of the developed world.
As mentioned in the most recent earnings call, StoneCo intends to build three "highly synergistic" platforms. These consist of a financial platform for small and medium-sized businesses, a fintech-as-a-service platform, and a "full commerce platform" which will serve businesses of all sizes.
StoneCo's management expects growth for total payment-volume growth on its payment-processing platform to continue accelerating in the fourth quarter, and it looks like the service has a long runway for expansion. The company is also guiding for strong merchant-customer additions in 2021.
Customers should also remember that this growth has occurred in one country only. As mentioned before, other Latin American countries have a similar financial culture. Since Brazil accounts for about one-third of the population of Latin America, it is far from reaching its potential, even in its home region.
Indeed, StoneCo would face MercadoPago as a direct competitor. However, market research firm Valuates forecasts that the global fintech market will grow at a compound annual growth rate of 24% through 2025.
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StoneCo has earned a consensus recommendation of “Buy” from the fourteen analysts that are covering the stock. One research analyst has rated the stock with a sell rating, five have assigned a hold rating, seven have given a buy rating and one has given a strong buy rating to the company.
Bradesco BBI released a note from analyst Victor Schabbel on Nov. 2, upgrading the firm's rating on the stock from "underperform" to "neutral" and raising the one-year price target on the stock from $42 to $53 per share. Susquehanna's James Friedman then published a note on Nov. 12, maintaining a positive rating on the stock and hiking his price target from $68 to $74 per share.
Several other analysts have commented on the stock.....
Bank of America upped their price objective on shares of StoneCo from $61.00 to $68.00 and gave the company a “neutral” rating in a research note on Wednesday, November 18th.
Citigroup began coverage on shares of StoneCo in a research note on Friday, August 14th. They issued a “buy” rating and a $58.00 price objective on the stock.
140166 raised shares of StoneCo from a “neutral” rating to a “positive” rating and upped their price objective for the company from $50.00 to $68.00 in a research note on Friday, October 23rd.
Finally, Bradesco Corretora raised shares of StoneCo from an “underperform” rating to a “neutral” rating and upped their price objective for the company from $42.00 to $53.00 in a research note on Friday, October 30th.
StoneCo is known as the PayPal of Brazil. It is a fintech company that is used primarily by entrepreneurs and small businesses.
The company has shown it can grow even under adverse market conditions. Hence, investors should expect the growth to continue even if the contagion lingers for longer than expected.
StoneCo stock has continued to inch higher in December's trading.
The company’s revenue retention of above 100% with digital small and medium business clients shows how sticky its platform is. StoneCo will become a full commerce platform after enhancing its product with the Linx acquisition.
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