Tech Stock a Profit Opportunity?
Legendary investor Warren Buffett isn’t really known for betting on tech stocks. For the most part, he’s known for being a buy-and-hold investor of well-established “boring” businesses like Coca-Cola Co (NYSE:KO) and Wells Fargo & Co (NYSE:WFC) rather than someone who buys the hottest tech names.
However, this also means when the Oracle of Omaha does put his money in an up-and-coming tech company, it could be something special.
And that’s why today I want to talk to you about StoneCo Ltd (NASDAQ:STNE).
Headquartered in Sao Paulo, Brazil, StoneCo provides financial technology (fintech) solutions that help merchants conduct e-commerce seamlessly through in-store, online, and mobile channels.
The company completed its initial public offering (IPO) on the Nasdaq in October 2018. And Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.B) was one of the early backers.
According to Berkshire’s latest “13F” filing to the U.S. Securities and Exchange Commission, it owned 14.2 million shares of the fintech company as of September 30. At the current share price, that stake in StoneCo is worth approximately $536.2 million. (Source: “Form 13F Information Table,” United States Securities and Exchange Commission, last accessed December 3, 2019.)
The big question now, of course, is: should investors follow the Oracle of Omaha’s lead?
Well, for those who like fast-growing tech businesses, STNE stock certainly looks appealing.
StoneCo Ltd Runs a Fast-Growing Business
Because StoneCo is a Brazilian company, we don’t hear about it that often in the U.S. financial media. However, the sheer growth in its business could rival some of the best tech stocks in America.
Consider this: when StoneCo went public, its active client base was around 234,700. The company defines active clients as merchants that have completed at least one electronic payment transaction with StoneCo in the preceding 90 days. By the end of the third quarter of 2019, the company had 428,900 active clients. (Source: “3Q19 Earnings Presentation,” StoneCo Ltd, last accessed November 29, 2019.)
So, in just one year, the company grew its client base by 82.7%.
With more merchants using the company’s fintech solutions, it shouldn’t come as a surprise that StoneCo’s financials have improved substantially.
In the third quarter of 2019, the company generated R$671.1 million (US$159.58 million) of total revenue, representing a 62.1% increase year-over-year. (Source: “StoneCo Reports Third Quarter 2019 Financial Results,” StoneCo Ltd, November 21, 2019.)
Strong top-line growth was driven by a 49.8% increase in total payment volume and a higher take rate. In StoneCo’s business, the “take rate” is the percentage fee that it collects on sales by merchants. In the third quarter, the company’s take rate was 1.91%, up from 1.85% in the prior quarter.
Better yet, the business also got more lucrative, as StoneCo’s pre-tax profit margin came in at 40.8% for the third quarter of 2019. This marked a sizable expansion from a pre-tax profit margin of 31.6% achieved in the year-ago period.
At its bottom line, the company earned an adjusted net income of R$201.9 million (US$48.0 million) in the reporting quarter, which more than doubled the R$89.3 million (US$21.2 million) earned a year ago.
StoneCo Ltd (NASDAQ:STNE) Stock Chart
Chart courtesy of StockCharts.com
However you look at it, StoneCo Ltd is firing on all cylinders. And, as you’d expect from a fast-growing fintech business, StoneCo stock has built up some strong upward momentum. Since the beginning of this year, the company’s share price has skyrocketed 105.3%.
And because this tech stock gets the approval from Warren Buffett, maybe growth investors should consider it, too.