Warren Buffett and his team Berkshire Hathaway are known for their value-oriented approach to investing. So when choosing something a little different, investors should definitely consider this.
Berkshire Hathaway has taken a position in Brazilian fintech PierreCo (STNE -2.71%) when it went public in 2018. It is down 42% since its initial public offering (IPO) and 80% from its highs.
Did Buffett make a mistake? When he does, he doesn't hesitate to sell. But Berkshire Hathaway is hanging on. Is StoneCo stock a buy today?
This isn't your typical Buffett stock
StoneCo is a young and growing company that offers payment and management solutions to small and medium-sized businesses, such as Block And PayPal do in the United States. This is a departure from the standard Buffett company, which is a blue-chip, established, and slower-growing company.
StoneCo has seen relatively stable and high revenue growth over the past three years.
Management sees huge opportunities and refines its mission to offer software, hardware and services to help micro, small and medium businesses grow.
Developing a wider range of services generates higher revenues at lower costs, with more customers signing up for more products. For micro businesses – generally defined as employing fewer than 10 people – StoneCo's simple solutions attract customers who need fast, easy-to-use services at low prices. These are also inexpensive for StoneCo because they are completely digital and offer little customization.
Its Stone and Lynx products aimed at larger customers are payment and merchant processing products with higher customization, and they appeal to businesses that value the broad range of services available in a comprehensive solution.
StoneCo also offers credit and banking products that allow businesses to meet all their financial needs in one place. As it gains market share, particularly among large enterprises, it expects total payments volume to have a compound annual growth rate (CAGR) of 13% over the next few years.
Merchant payment customers grew 42% year-over-year in the third quarter of 2023, and banking customers more than tripled to 1.9 million.
The road is finally smoothing out
Although StoneCo reports rapid revenue growth and strong profits, it has experienced significant challenges along the way.
The regulatory issues that affected its credit product in 2021 had major consequences. StoneCo faced higher than expected delinquency rates and it took time to rebuild its lending business and restore investor confidence.
Partly in response to the company's problems, there has been very high management turnover. This was necessary to reorient the business and get back on track, but it also presents its own volatility. StoneCo went from a high-growth company with bright prospects to a risky business.
Under new management, the company appears to be stabilizing. Adjusted net income quadrupled year over year in the fourth quarter, with the margin increasing from 4.3% to 13.9%, and it reported three consecutive quarters of net income under generally accepted accounting principles ( GAAP). Management expects adjusted net sales to have a CAGR of 31% through 2027.
The stock looks like a possible buy for some investors
At current prices, StoneCo stock trades at an incredibly cheap one-year forward price-to-earnings ratio of 12 and a price-to-sales ratio of 2.7.
There are many opportunities for the company and it is handling its problems effectively. The group has also maintained strong sales growth despite the challenges, reinforcing the argument that it is a strong industry leader. But its progression has not yet been sustained enough to be considered low risk.
If you have an appetite for risk, you might consider taking a small position in StoneCo. If not, you may want to keep it on your watchlist.
Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Berkshire Hathaway, Block, PayPal and StoneCo. The Motley Fool recommends the following options: Short March 2024 calls at $67.50 on PayPal. The Motley Fool has a disclosure policy.