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StoneCo Stock: Brazil’s PayPal?
Stock Analysis & Ideas

StoneCo Stock: Brazil’s PayPal?

I am bullish on StoneCo Limited (STNE) as it has strong growth momentum and a lengthy growth runway, and the stock currently trades at an attractive valuation based on its multiples relative to its historical levels as well as its steep discount to its average target price.

StoneCo is one of the leading payment companies in Brazil, but it has come under a lot of regulatory scrutiny as of late. While this has affected its performance in the stock market, the company is expected to make it through the difficult times and close 2022 on a strong note.

StoneCo Limited provides end-to-end cloud-based technology to merchants so they can conduct commerce through online, mobile, and in-store channels. In more ways than one, StoneCo is very similar to PayPal, except it is more dominant in Brazil and the surrounding areas.

Strengths

This is an industry that continues to grow and StoneCo is no exception. It has generated consistently strong revenue growth rates, including a 63.1% rate in 2019, 28.9% rate in 2020, and is expected to deliver a 40.4% growth rate in 2021 alongside a 66.4% revenue growth rate in 2022.

A risk facing the company – especially given that it operates in more economically and geopolitically volatile geographies – is that it makes small business loans that are backed by its debt.

The rising interest rates in Brazil could therefore prove problematic for the business if they continues to run higher.

With that said, the payment industry in Brazil is massive, giving companies like StoneCo Limited massive long-term growth potential.

Recent Results

Q3 2021 for StoneCo Limited was strong and the company’s results reflected its ongoing popularity among Brazilian merchants.

The total revenue was R$5.9 billion, of which software solutions represented 21% while financial services represented 72%.

Valuation Metrics

STNE stock looks attractively priced here as it trades well below its historical averages on an enterprise value-to-EBITDA ratio and normalized earnings per share basis.

Its enterprise value-to-EBITDA ratio is 8.1x compared to its historical average of 27.5x, and its price-to-normalized earnings per share ratio is 42.7x compared to its historical average of 51.1x.

Analysts expect revenue to grow by 66.4% in 2022, and EBITDA to grow by a whopping 164.5% in 2022.

Wall Street’s Take

According to Wall Street analysts, STNE earns a HOLD analyst consensus based on one Buy rating, four Hold Ratings and two Sell ratings in the past three months.

Additionally, the average StoneCo price target of $23 puts the upside potential at 59.9%.

Summary and Conclusions

StoneCo is a leading financial technology and software company in Brazil and the surrounding geographies. As a result, it has enjoyed very strong growth for several years now and is poised to continue growing at a rapid pace for the foreseeable future.

Additionally, its stock price looks very cheap right now on an EV/EBITDA and price-to-normalized earnings basis, and its average price target implies massive upside over the next year.

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