Constellation Stocks 5 & 6: StoneCo (STNE) & Nu Holdings (NU) - Growth Stories. Part I
With the looming potential of interest rate cuts and a diminishing value of the USD, my attention has turned towards the emerging markets and vibrant fintech sector of Brazil in particular.
Intro
These companies stand at the forefront of Brazil's fintech revolution, offering complementary strengths that make them uniquely interesting. StoneCo, with its robust B2B focus, provides innovative financial solutions that empower businesses to thrive in a digital economy. On the flip side, Nu Holdings, with its strong consumer-centric approach, is reshaping the B2C financial landscape, offering intuitive and accessible financial services to millions. Together, they paint a comprehensive picture of a fintech ecosystem that is as diverse as it is dynamic, making them compelling candidates for analysis in light of the current economic shifts.
The global fintech market is valued at $133.84 Billion in the year 2022 and is projected to reach a value of $556.58 Billion by the year 2030 with a CAGR of 19.5% (Source: Vantage Market Research).
Company Description
StoneCo engages in the provision of financial technology solutions. It caters to merchants and partners that conduct electronic commerce across in-store, online, and mobile channels. The firm offers a cloud-based technology platform, electronic payments, and automation of business processes at the point of sale. StoneCo serves customers in Brazil. It was founded in 2000 and is headquartered in George Town, Cayman Islands.
Last Close Price: $17.63
Shares out: 309.0M
MCap: ~ $5B
Next Earnings Date: 24 May 2024
Short Interest: 3.34%
Buyback budget: $205.5M
Sector: Financials
Industry: Financial Services
Revenue Streams
The company makes money by charging fees for its services. These include transaction payment processing, prepayment financing, subscription, and equipment rentals. The company's target audience is small- and medium-sized businesses.
Source: Investor Day 2023 Presentation
QUANTS
Financial Outlook
In 4Q2023 revenue amounting to R$3.2bn ($640mn) is up 20.1% y/y from R$2.7bn ($540mn) and slightly increased q/q from R$3.1bn ($620 mn) in 3Q2023.
Adjusted Net income surged 176% to R$564mn($112.8mn) from 4Q2022's R$204mn($40.8mn).
Source: Investor Day 2023 Presentation
The company’s market is growing. Brazil is the largest economy in Latin America and continues to experience rapid e-commerce growth of 14.3% which should exceed US$200 billion by 2026.
Source: Investor Day 2023 Presentation
The company has a strategic vision, it is expanding its business model through several verticals and types of clients.
Industry Comps Analysis
Source: Constellation Stocks Dash
The company stands out from its industry peers and is valued below the median, with a Price-to-Earnings (PE) ratio of approximately 13x. The market is reacting negatively to the mismatch between its revenue growth and earnings growth, even though its earnings growth is quite impressive.
Stock Price Target Estimate
Source: Constellation Stocks Dash
While there are several theoretical methods for valuing companies, such as Discounted Cash Flow (DCF) modeling or using Comparable Multiples, the reality is that the market often doesn't adhere to these valuations strictly and can behave irrationally over extended periods and driven by any external factors. Given this unpredictability, I don't aim to calculate an exact value for a company. Instead, my approach focuses on assessing whether a company has growth potential. I consider analysts' estimates and the market consensus on revenue and earnings to guide my valuation. Then I estimate the company's value based on what I believe to be reasonable Price-to-Earnings (P/E) and Price-to-Sales (P/S) ratios, adjusted for growth using the Price/Earnings to Growth (PEG) ratio.
For StoneCo (STNE), using a conservative approach with a P/E ratio of 20x and a P/S ratio of approximately 3x for the fiscal year 2024, I've determined a target share price of around $26. This target is 50% higher than its current stock price, suggesting a strong upside potential and an attractive risk-to-reward profile over a one-year investment horizon.
QUALS
4Q2023 Earnings Key Management Commentary
“After reflecting on our achievements, strategic direction, and how we're setting ourselves up for future success, I also wanted to address our 2023 results. Last year was a milestone year for us, marking a complete rebound from the challenges faced in 2021. We closed the year with exceptional results, particularly in the fourth quarter, when we accomplished significant progress in our key strategic initiatives.”
“The fourth quarter recorded a dip due to one-off restructuring costs, but these moves we made to generate savings for us in 2024.”
“In summary, 2023 was a year of significant achievements and strategic advancements for us and our 4Q results have positioned us favorably to continue to perform well in 2024 and make progress towards our 2027 goals.”
Headwinds and Key Risks
The company operates in a market subject to currency volatility (Brazilian Real against USD). This volatility could impact financial results, especially as StoneCo continues to expand internationally.
There could be a risk of competition from the Pix payment system by Brasil’s central bank.
The company faces the challenge of managing rising costs, especially in services and administrative expenses.
Stay tuned for Part 2 about Nu Holdings (NU), coming this Thursday!
Co-Authors: Nadia Gavrilova, Fedor Katkov, Katerina Kiseleva
Equity Research Marathon
In 2024, I'm on a mission: to publish 30 buy-side equity research reports to demonstrate in public a minimum quality bar in research that should be reached by anyone who decides to make any investing in the stock market. I’m eager to bring value and professional insights to retail investors and traders.