STNE Stock: Has Stone Co Been Oversold?

When you read media reports on the pace of the digital economy, you are often under the impression that the whole world has already gone digital. The rise of companies like Amazon (NASDAQ: AMZN) and Shopify (NYSE: SHOP) would have you believe that everyone is buying stuff online and e-commerce is the only way to go forward.

However, when you look at the actual numbers, you could be shocked. Online retail still accounts for only around 16% of total U.S. retail sales. And if online has such a small share in the world’s largest consumer-oriented country, the number must surely be lower in lesser developed countries. It means there is a lot of opportunity in emerging economies and smart companies will be able to capitalize on the same.

Brazil is one such country, and Stone Co (NASDAQ: STNE) is one such company. Brazil has around 13.5 million MSMBs (micro, small and medium businesses) and a large number of them don’t have access to e-commerce solutions. Stone Co provides those solutions.

The fintech company has been building itself to become a one-stop-shop in a country that is going digital at a very fast pace. At the end of Q1 2022, Stone Co had an active client base of 1.9 million after it added 160,100 clients in the quarter.

A look at Q1 earnings for StoneCo

Stone Co announced its numbers for Q1 of 2022 and posted revenue of $402 million, up 138.6% compared to the corresponding quarter in 2021. It beat the mid-range of the company’s guidance of $370 million to $380 million. StoneCo’s financial services platform revenues grew 107.8% to $345 million and its software platform revenues grew 11x to $65.5 million.

Adjusted net income came in at $26.5 million compared to $6.75 million in Q4 of 2021. That’s a massive improvement sequentially. However, it was a drop of 29.4% compared to $37.6 million that Stone Co reported in Q1 of 2021.

Why STNE stock should be on your watchlist

StoneCo operates in two key areas. The first one is financial services which include payment solutions, digital banking, credit, and insurance. This segment serves MSMBs as well as key accounts. The second segment is software which comprises two fronts. The Core front includes POS/ERP solutions, TEF and QR Code gateways, reconciliation, and CRM. The Digital front includes OMS, e-commerce platform, engagement tools, Ads solution, and Marketplace Hub.

The company’s banking business has grown sequentially. Stone Co said that the number of active digital banking accounts closed at 509,900, up 3.7% sequentially and 2.1x compared to Q1 of 2021. The average revenue per active client (ARPAC) was up 2.8x year-over-year and 32% sequentially.

Stone Co was heavily sold in the last year. It is down almost 81% in the last year and declined 53% in 2022. It was part of the great sell-off of growth stocks when markets realized that once lockdowns opened up and people started resuming their physical lives, demand would be limited for new-age tech companies.

However, there is a very solid chance that Stone Co has been oversold. People might have resumed their physical lives but shopping online is only going to increase in the coming years. It’s no surprise that StoneCo’s guidance for Q2 of 2022 is between $430 million and $440 million. EBIT ( earnings before interest and taxes) is expected to come in at $37 million, up 13.4% from Q1 2022.

This World Economic Forum report from May 22 says that “Brazilians are adopting digital payments faster than anyone else”. There is clearly a great opportunity here in the MSMBs space. Stone Co looks like it is in the perfect position to capitalize on it. It looks a good buy right now.

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