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This stock from Warren Buffett's portfolio is currently trading at a huge discount. Should we invest in it now?

Jamie Cameron
14. 10. 2022
5 min read

Warren Buffett is a world-famous investor who has achieved a lot in his investment career. He has gained popularity through above average performance, but also by finding and selecting undervalued stocks. Today, we're going to take a look at one stock that he included in his Berkshire Hathaway portfolio, but it hasn't done very well this year, which has had a significant impact on its price.

Warren Buffett

The stock mentioned in the introduction is StoneCo $STNE+1.5%. Shares of $STNE+1.5% have already lost more than 40% since the beginning of the year, yet nothing fundamental seems to have changed at the company, aside from its share price and a string of financial successes. Should we invest in it now like Warren Buffett?

In October 2018, Berkshire Hathaway announced plans for a large investment in Brazilian fintech company StoneCo, which focuses on providing financial technology solutions and offers an end-to-end cloud-based technology platform for conducting electronic trading.

StoneCo $STNE+1.5%

The performance of $STNE+1.5% stock this year.

Why is StoneCo attractive?

E-commerce in Brazil - Cashless transactions are a growing industry in Brazil, as in other emerging market economies where the majority of transactions are conducted in cash.

StoneCo provides a comprehensive cloud-based technology platform for merchants to conduct e-commerce in a traditional store, online and mobile. The cloud platform helps its clients connect, facilitate transactions, accept payments and grow their business.

The company makes money by charging fees for its services. These include transaction payment processing, advance funding, subscriptions, and equipment rentals. The company's target audience is small and medium-sized businesses.

Why is $STNE+1.5% stock down? Simply put, it's because macroeconomic challenges related to the Brazilian economy have caused investors to remain on the sidelines, and the stock has fallen sharply this year. StoneCo recently reported a pretty good Q2 report in which the company showed a rebound in revenue growth and margin expansion. However, continued macroeconomic uncertainties continue to push the stock down, even though fundamentally the company is performing well and moving forward.

  • On interest rates - After 12 straight interest rate hikes, the Brazilian central bank decided to hold interest rates steady at 13.75%. The significant and rapid rise in interest rates was one of the main reasons for the decline.

Why is StoneCo stock an interesting choice?

  • One of the positive developments after the pandemic is the acceleration in the use of digital payments. Before the global pandemic, Brazil was largely dependent on cash payment methods, with consumers slow to adopt digital payment methods.
  • The $STNE+1.5% currently estimates that there are more than 28 million SMEs in Brazil, and with STNE having under 2 million business relationships, there remain significant opportunities for growth in the coming years .
  • According to PagBrazil, approximately 16.3 million adults in Brazil do not have a bank account (10% of the adult population), while another 17.7 million adults have not used their bank account for at least one month. These unbanked adults collectively trade more than US$67 billion a year, representing a giant untapped market for StoneCo.
  • Importantly, the Department left its GDP growth forecast untouched at 2.5% for 2023, which seems a reasonable starting point. With Brazilian interest rates starting to flatten quite a bit and the Ministry of Economy raising its growth expectations, it seems that the Brazilian economy could gradually recover.
  • As interest rates in Brazil have risen significantly over the past 18 months, $STNE+1.5% has initiated several price increases to help offset its higher spending. I believe that if interest rates had declined over time, STNE would have maintained its prices and thus been able to generate higher incremental margins over the long term.
  • While macroeconomic environmental factors may impact the company's profitability, the longer-term trend of increasing digital payment mix is likely to remain strong for many years to come.

Quarterly results

  • The company reported revenue of $2.3 billion, up 275.6% year-over-year from $613.4 million.
  • The results are driven by improving banking rates. Financial services generated $1.9 billion and software services generated $350.7 million, up 242.5% and 720.3%, respectively.
  • TPV (total payments volume) for the quarter was $90.7 billion compared to $60.4 billion, a 50.3% increase year-over-year.
  • SME banking continues to gain strong traction. The active client base for payment services was 2.07 million, up 97.6% from 1.05 million.
  • Adjusted EBITDA increased to $1.06 billion in the quarter from negative ($17.9) million. Adjusted EBITDA margin was 45.9%, a sequential improvement of 6.4 percentage points, which is attributed to better cost control and lower marketing expenses.

CEO: I believe our strong second quarter results continue to reinforce our recovery and we are seeing a more consistent pattern of performance in the first half of 2022. Our business is performing very well. We are winning new clients faster than last quarter and delivering strong revenue growth while increasing profitability. We are encouraged by the trends we have seen in our business in the first half of the year and believe the outlook for continued growth and margin expansion reflects this view. We see the second half of the year as an opportunity to build on our successes in the first half, to demonstrate that our recovery is well underway and that things are improving favourably in the longer term.

According to ALFA SPREAD, $STNE+1.5% stock is significantly undervalued 👇

More or less, you could say that many analysts see it similarly and some believe in a quick rise to the $20 per share mark.

Conclusion

The biggest risk to the $STNE+1.5% thesis remains the uncertain macroeconomic environment and the Brazilian economy. If the macro environment deteriorates, then we could see slower revenue growth or margin pressure. If these adverse factors persist, investors could push valuations even lower. However, the overall potential for the company is huge, Brazil is large and a large number of people are unbanked here, which gives StoneCo room to grow. As I write in the article - There are over 28 million mid-sized and small businesses in Brazil and with $STNE+1.5% having under 2 million business relationships, the opportunity for growth is really big.

Please note that this is not a financial advisory. Every investment must go through a thorough analysis.

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