STNE Stock: Why Warren Buffett Made a Mistake with StoneCo


StoneCo Ltd. (NASDAQ:STNE) is a financial technology solutions company based in the Cayman Islands and operating in Brazil. STNE stock began trading in 2018 with an initial public offering price of $ 24, raising total proceeds of $ 1.22 billion.

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It has been a dramatic year for STNE stock, having lost almost 80% of its value since January 1. What’s interesting about StoneCo is that Warren Buffett is a major investor in STNE stock.

Is STNE action a flop? I argue that Buffett was wrong about this fintech, but it’s okay. It is impossible to be right about all of your stock recommendations.

How did this famous and big investor go wrong with this title?

First of all, the results for the third quarter of 2021 showed negative trends. Revenue growth, the total number of active payment customers and the total payment volume increased. On the negative side, there was a net loss of 1.26 billion Brazilian reals ($ 223 million) due to a large depreciation related to an investment in Banco Inter, and the catch rate decreased.

Class actions

When I read about a lawsuit against a company, I am very skeptical for two reasons. First, I believe a law firm would not take legal action if it did not have evidence to support its case. Second, bad publicity for a company may not help its stock price rally.

Unless, of course, his fundamentals are great, which facilitates a lasting rebound.

Take, for example, the following class action lawsuit that was recently filed: “StoneCo and certain of its executives are accused of failing to disclose material information during the litigation period, in violation of federal securities laws. “

The main argument is that StoneCo suspended its credit product and when it said it would test it again in the form of short-term loans, it did not provide specific guidance on credit volumes. . As a result, STNE stock fell around 34% on November 17 and investors suffered heavy losses.

The macroeconomic environment is unstable

To thrive, a company and its stocks need a strong economy, a strong sector and a strong industry. Brazil has major problems like inflation, unemployment and a local currency that has depreciated against the US dollar.

The resurgence of the coronavirus crisis in Brazil is another problem for its economy.

Buffett’s investment in STNE shares

Berkshire Hathaway’s (NYSE:BRK.A, NYSE:BRK.B) Buffett focuses on Benjamin Graham’s value investing philosophy, seeking stocks that are priced well below their intrinsic value. Looking at a company as a whole, Buffett does not invest for the short term but for a considerable length of time until the desired convergence of the share price and its intrinsic value begins to occur.

Some crucial factors for monitoring business debt, profit margins, free cash flow, earnings per share, and valuation metrics.

My first argument is that StoneCo became unprofitable in 2021 with negative EPS. This is the first red flag as the business has been profitable in 2018, 2019 and 2020. My second point is that the trend in net operating cash flow has been both weak and mostly negative from 2016 to 2019. , according to data on Market surveillance. On a quarterly basis in 2021, there was a rebound with positive net operating cash flow reported in the second and third quarters. Still, the long term trend is negative.

Operating cash flow is a measure of the amount of cash generated from normal business operations.

Change to The morning star looking at a five year trend for gross margin we can see that StoneCo saw a peak value in 2019 of 82.1% and declining values ​​in 2020 and the last 12 months of 75.8% and 65.9 %, respectively. The same trend is valid for the net margin, with a peak of 33.61% in 2019 and then of 26.86% and -6.67% for 2020 and the last 12 months, respectively.

The trend for free cash flow per share was very weak. The free cash flow for 2016-2020 is negative. This means the company has spent money and from a valuation standpoint this is not good news. Free cash flow is used to estimate the intrinsic value of stocks. The higher the number, the better. Here we have the opposite case.

Is STNE stock cheap now after it sells off? There are mixed signals. On a relative basis, in some key measures the STNE action appears to be undervalued and in others significantly overvalued.

The result for STNE Stock

With a 52 week range of $ 14.02 to $ 95.12 and a current price of less than $ 18, STNE stock has had a wild year. If Buffett sold his shares near his peak price, then he would have made a good profit.

Deteriorating financial performance and 12-month net losses, unstable economy and weak local currency are major negative factors for STNE stock. It was a flop. I don’t like the stock even after this sale.

Beware of trying to catch a falling knife in stock investing. It can hurt a lot.

As of the publication date, Stavros Georgiadis, CFA does not have (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to Publication guidelines.


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