Market Commentary: $25 Billion Stock On Sale 90% Lower?
One of Warren Buffett’s old favorites, Brazil’s StoneCo, has emerged with a strategy that may create a U-turn in it share price. What was once a $25 billion company has crashed to just $3 billion and change in market capitalization.
Yet StoneCo hasn’t been knocked out for the count yet. It surprised investors with an announcement that signaled it was bullish on its own company via a R$300 million (approximately $58.2 million) share repurchase program.
Management had previously undertaken a similar repurchase initiative back in May 2021, buying around $53 million in shares when the stock was trading between $8 to $12 per share.
In comparison, the stock currently trades at $9 and change now, about 30% lower than its summer high. So, is it time to join management and buy StoneCo shares?
Key Points
- Brazil’s StoneCo has signaled its confidence in its own future by announcing a R$300 million ($58.2 million) share repurchase program.
- Despite a decrease in its market capitalization from $25 billion to $3 billion, StoneCo’s strong financials support a new buyback scheme.
- StoneCo’s balance sheet is robust, featuring $460 million in cash and $729 million in short-term investments, highlighting the company’s strategic financial decision-making.
Why Is StoneCo Buying Back Shares?
The decision of StoneCo’s board to authorize a share purchase scheme likely originates from an expectation that the company’s market cap is well below intrinsic value.
A detailed financial analysis would seem to align with that assessment. The company posted net income of over half a billion Brazilian real ($103 million) in the first half of 2023 and Q2 results offer further encouragement: revenue climbed by 30.0% in the last 6 months to $1.1 billion.
Clearly, StoneCo is operating from a position of strength, with a balance sheet that reflects conservative, strategic decision-making with cash up to $460 million and short-term investments up to $729 million.
While its share price is down substantially from a few years ago, StoneCo still presents an appealing opportunity for investors willing to ride the price rollercoaster. After all, the company is trading at just 19 times trailing earnings.
4 Reasons To Be Bullish
- While many investors focus on StoneCo’s performance in larger markets, few realize the company’s efforts to penetrate underserved and rural areas in Brazil. This strategic move is aimed at establishing a loyal customer base, offering long-term stability and potentially higher margins versus saturated markets.
- By owning its tech stack, the company can adapt quickly to market changes and customer demands, offering a more responsive and cost-effective service that could drive revenue growth.
- While StoneCo is primarily known for its payment processing solutions, it also offers additional services like banking solutions and credit offerings, allowing the company to cross-sell and upsell, enhancing customer lifetime value.
- Management has been forming strategic partnerships with other businesses, including e-commerce platforms and financial institutions, offering symbiotic benefits and rapid scaling opportunities that could be a pivotal factor in StoneCo’s growth trajectory.
The Big Picture Data-Driven Approach
StoneCo seems to be navigating an uncertain economic landscape in Brazil rather effectively, buoyed by strong business performance and optimistic earnings projections.
The company has also been proactive in managing its cash reserves, setting the stage for this week’s share repurchase program. The timing of this buyback is far from random; it’s a strategic move that reflects management’s confidence in revenue growth.
With its strong fundamentals, investor-friendly initiatives, and compelling valuation, StoneCo is a stock that warrants a closer look.
