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StoneCo May Have Potential, But It Comes with Macroeconomic Risks

StoneCo (NASDAQ:STNE) provides financial technology solutions to merchants in Brazil. But shares of STNE stock have collapsed nearly 87% in the past one year. The stock has also seen losses of approximately 28% so far in 2022.
Source: FO…

StoneCo (NASDAQ:STNE) provides financial technology solutions to merchants in Brazil. But shares of STNE stock have collapsed nearly 87% in the past one year. The stock has also seen losses of approximately 28% so far in 2022.

Source: FOTOGRIN / Shutterstock.com

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Back in late December 2021, I argued that STNE stock was not a quality value name. My reasoning? StoneCo has seen class action lawsuits, an unstable macroeconomic environment and a third-quarter earnings report featuring a net loss of 1.26 billion in Brazilian real (R$), or $223 million. With these negative factors surrounding the company, I concluded that the stock was a “flop.”

So, has anything changed since? The short answer: not much. In anticipation of its Q4 and full-year 2021 financial results, though, we should take another look at Q3. We should also refer to Brazil’s economic indicators.

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Here’s what you should know about STNE stock.

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STNE Stock and Brazil’s Economic Indicators

To start our discussion of STNE stock, we really need to look at the bigger picture. Investing in Brazil starts with examining the trends of its key economic indicators. Any company that claims to have the best product or service ever will still not perform well if its broader economic environment — such as sector, industry or country of operation — has severe structural problems.

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For 2020, Brazil had a rate of change of real GDP of -4.06%. It also saw inflation (the annual percent change in the consumer price index, or CPI) of 10.38% as of January, 2022, a policy rate of 7.75% as of October 2021 and an unemployment rate of 11.60% as of November 2021. On top of this, the business confidence survey had a low value of 11.60 as of February 2022. Finally, retail sales year-over-year (YOY) as of December 2021 were -2.70%, representing a large deterioration.

For a company like StoneCo, these indicators are not ideal. They spell tough times ahead. That will require a lot of effort, energy and significant results on the company’s part in order to convince investors that STNE stock is worth investing in.

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Before we proceed any further, we should also note that STNE has a beta (five years monthly) of 2.32 according to Yahoo! Finance. That also makes it a highly volatile stock. It could move either up or down substantially, depending on market conditions.

The Good and Bad Points of Q3

So, with that said, let’s revisit Q3. True, there are a couple of positive operating and financial metrics to be found.

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First, there was the YOY increase of 7.6% for total payment volume (TPV) to R$ 75 billion versus R$ 69.7 billion. The company also saw 1.39 million total active payment clients, a 111.8% YOY increase. Finally, micromerchants active clients came to 545,100. That was a 739% YOY increase.

There’s more. Total revenue also surged more than 57% to R$ 1.47 billion, up from R$ 934.3 million in Q3 2020. However, adjusted net income fell 54% to R$ 132.7 million. That was down from R$ 287.9 million. Still, consolidated software revenue spiked 1,571% to R$ 314.8 million compared to R$ 18.8 million in Q3 2020. But maybe most importantly, the net loss in the Q3 2021 was R$ 1.26 billion, compared with a net income of R$ 249.1 million in Q3 2020.

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Finally, cost of services in Q3 was R$ 525.6 million, 153% higher YOY due to investments to support the growth of operations. Additionally, administrative expenses were R$ 359.8 million, 239% higher YOY, while selling expenses were R$ 308.2 million in the quarter, an increase of 121% YOY.

Those are the Q3 highlights for STNE stock.

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The Bottom Line on StoneCo

The summary of all this data shows two major trends. First, there is growth in StoneCo’s operating metrics — namely TPV and clients. On the other hand, though, there was also a significant rise in total expenses.

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StoneCo turned a net margin of 26.86% in 202o. But on a TTM basis, it’s at -6.67%. It also saw a return on equity (ROE) of 8.20% in 2020 versus -1.73% on a TTM basis. Lastly, it had an operating margin of 47.5% in 2020 versus 24.4% on a TTM basis.

All things consider, investors interested in STNE stock should wait for the release of Q4 and full-year 2021 financial results before making a move. These results will help investors evaluate whether there has been any improvement in the company’s financial performance. Until then, it’s wiser to avoid STNE stock.

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On the date of publication, Stavros Georgiadis did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.

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