The rise of financial technology (fintech) in Brazil has been a major force for change in the country’s economy. Driven by technological innovation and fierce market demand, fintech has made financial services more accessible and efficient for millions of Brazilians.
One of the leading players in the Brazilian fintech space is StoneCo (STNE), which provides customized payment-handling solutions to small and medium-sized businesses (SMBs) across the country. StoneCo’s innovative approach has helped it to bridge the divide between traditional banking and the needs of modern businesses.
In recent years, StoneCo has attracted the attention of some of the world’s most successful investors, including Warren Buffett. Buffett’s investment in StoneCo is a vote of confidence in the company’s future prospects. He owns 3.4% of the outstanding float.
With Brazil signaling that rate cuts may be on the horizon, is now the time to buy this Buffett favorite?
Beautiful Fintech Financials
As we looked under the hood, we could quickly discern what it is that appealed to Buffett. Look no further than the company’s P&L to see how beautiful sales have been.
In 2022 the top line grew by 58%, which followed an 85% pop in 2021 and 32% the year prior. Indeed, every year for the past 6 years StoneCo has reported highly impressive growth rates.
And each year the impressive revenues have translated to positive operating income. From our calculations, running a discounted cash flow forecast analysis, that has all boiled down to an undervalued stock too. We see fair value at $18.49 per share, a 33% hike from current levels if materialized.
Technically, the stock has been forming a base for about a year and a half, so it may not be a stock that races out of the gate but it sure does appear like the downside risk is muted versus the upside reward potential.
What To Watch For?
The company’s revenue growth has been erratic in the past, and it faces competition from other fintech providers and traditional banks. Additionally, the broader economic context in Brazil, including high inflation and elevated interest rates, could pose challenges for StoneCo.
With that said, StoneCo is a well-positioned company with a strong track record of growth but it’s not without its potential pitfalls. For example, the government needs to do more to regulate the fintech industry and protect consumers and fintech providers need to work together to create a more unified and seamless user experience.
Despite these challenges, the future of fintech in Brazil looks bright. With its large and growing population, Brazil is a prime market for fintech innovation. As the industry continues to evolve, it is likely to have a significant impact on the way Brazilians access and use financial services.