StoneCo Ltd: A Little-Known Fintech Stock Owned by Warren Buffett

StoneCo Ltd: A Little-Known Fintech Stock Owned by Warren BuffettThis Fintech Stock Could Be Special

Most people have never heard of StoneCo Ltd (NASDAQ:STNE). The reason is simple: the financial technology (fintech) solutions company operates in Brazil, so it doesn’t really make many headlines in U.S. financial media.

However, StoneCo stock is listed on the Nasdaq, so it’s very easy for American investors to get a piece of the action. Better yet, among the shareholders of this Brazilian fintech company is legendary investor Warren Buffett.

In fact, the Oracle of Omaha discovered StoneCo Ltd relatively early; he was one of the company’s backers during its initial public offering (IPO) in 2018.

According to Buffett’s company Berkshire Hathaway Inc.’s (NYSE:BRK.B) latest “13F” filing to the U.S. Securities and Exchange Commission, Berkshire owned 14.2 million shares of StoneCo stock as of June 30, 2020. (Source: “Form 13F Information Table,” United States Securities and Exchange Commission, last accessed August 26, 2020.)

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Now, if you’ve been following Warren Buffett closely, you’d know that he is not really known for investing in tech start-ups.

For the most part, the Oracle of Omaha likes large companies that have been around for a while. For instance, Berkshire’s top five holdings at the end of June 2020 were Apple Inc. (NASDAQ:AAPL), Bank of America Corp (NYSE:BAC), Coca-Cola Co (NYSE:KO), American Express Company (NYSE:AXP), and Kraft Heinz Co (NASDAQ:KHC). (Source: Ibid.)

But its stake in this Brazilian fintech firm has served Berkshire quite well.

When StoneCo went public, its IPO price was $24.00. Today, STNE stock trades at $50.78 per share, meaning Berkshire’s position in the company is worth approximately $720.0 million.

What Buffett Sees in Little-Known Stock

The reality is that even though STNE stock seems to be an under-the-radar ticker, the company’s business has been booming.

Because StoneCo provides fintech solutions to help merchants conduct electronic commerce across in-store, online, and mobile channels, a key performance metric of its business is total payment volume.

When the company went public, its quarterly payment volume was R$21.8 billion (USD$3.9 billion). By the second quarter of 2020, the number had grown to R$38.1 billion (USD$6.8 billion). (Source: “2Q20 Earnings Presentation,” StoneCo Ltd, last accessed August 26, 2020.)

Another useful metric that shows StoneCo’s growth is the number of its active clients. The company defines active clients as merchants that have completed at least one electronic payment transaction using StoneCo’s platform within the preceding 90 days.

At the time of StoneCo’s IPO, it had 234,000 active clients. In the most recent quarter, the company had 519,000 active clients. That’s growth of over 120% in less than two years.

Of course, any business discussion in this day and age would not be complete without looking at the impact of the COVID-19 pandemic.

In the case of StoneCo, we know that a lot of businesses in Brazil were ordered to shut down in the second quarter of this year. So, you’d expect the company’s financials to have taken a hit.

And yet, the growth momentum at this fintech company seems to be continuing.

According to the latest earnings report, StoneCo Ltd generated R$667.4 million (USD$119.0 million) in total revenue in the second quarter of 2020, representing a 13.8% increase year-over-year. Excluding other financial income, which was mainly interest earned on cash, revenue growth would have been 15.5%. (Source: “StoneCo Reports Second Quarter 2020 Financial Results,” StoneCo Ltd, August 11, 2020.)

As I mentioned earlier, the company’s total payment volume was R$38.1 billion (USD$6.79 billion) in the second quarter of 2020—that’s up 27.9% from a year ago. Moreover, the company’s transaction volume in the second half of July 2020 was actually higher compared to the first half of March 2020, indicating that the business has more than recovered to pre-COVID levels.

StoneCo’s resilient business is also reflected in its share price performance. Like a lot of stocks, STNE tumbled during the market sell-off in March, but it has been climbing back up steadily since then.

Looking at the chart below, you’ll see that the stock is actually up more than 14% year to date.

StoneCo Ltd (NASDAQ:STNE) Stock Chart

Chart courtesy of StockCharts.com

Analyst Take

Ultimately, businesses are already moving to paperless transactions. And with the COVID-19 pandemic, having digital payment solutions seems even more important for merchants. That means StoneCo Ltd could be riding on a strong secular tailwind. And STNE investors—including Mr. Buffett—may be further rewarded.