StoneCo Ltd: Warren Buffett’s Fave FinTech Stock up 188% Since April

StoneCo Ltd’s Business Returns to Pre-COVID-19 Levels

StoneCo Ltd (NASDAQ:STNE) is where some of the biggest investors are parking their money. Warren Buffett, CEO of Berkshire Hathaway Inc (NYSE:BRK/A, BRK.B) is bullish on StoneCo Ltd stock.

StoneCo’s a financial technology company that provides end-to-end cloud-based ecommerce technology for in-store, online, and mobile customers in Brazil.

According to the company’s latest F13 filing, the Oracle of Omaha has 14.6 million shares in STNE, or about an eight percent stake in the company. The shares are worth, at the time of this writing, $219.7 million. (Source: “Berkshire Hathaway 13F,” United States Securities and Exchange Commission, August 14, 2020.)

Buffett is not the only person with deep pockets who’s bullish on StoneCo Ltd. Jack Ma, the co-founder of Alibaba Group Holding Ltd (NYSE:BABA), and Jorge Paulo Lemann, Marcel Telles, and Carlos Alberto Sicupira, the founders of the private equity firm 3G Capital, are also backing StoneCo.

Shares in the Cayman Islands-based company have been on a tear since bottoming in April, advancing 188%. STNE stock has also erased all of its losses associated with the coronavirus pandemic sell-off and has advanced more than 28% year-to-date.

There’s good reason for investor optimism.

First, StoneCo Ltd announced solid second-quarter results; management said its business began to rebound during the quarter and return to pre-COVID-19 levels across all of its business channels.

More interestingly, on August 11, STNE shares surged after StoneCo Ltd announced it was acquiring retail software firm Linx SA (NYSE:LINX) in an all-stock deal valued at approximately $1.1 billion.

The combined companies make for the perfect marriage between the hardware, software, and services that online and traditional brick-and-mortar stores need.

Chart courtesy of StockCharts.com

STNE Stock Overview

StoneCo Ltd is a Brazilian fintech company that caters to merchants, helping merchants and partners conduct electronic commerce across in-store, online, and mobile channels. In a nutshell, the company’s cloud-based technology helps its clients in Brazil connect, get paid, and grow their businesses. (Source: “Stone & Linx Business Combination Presentation,” StoneCo Ltd, August 11, 2020.)

StoneCo also sells its fintech solutions to integrated partners, including payment service providers. These are firms that contract with a merchant to provide them with payment solutions and marketplaces to conduct ecommerce.

The company also developed its proprietary “StoneHubs” to better reach and service its clients. StoneHubs are local operations close to the company’s clients that include integrated sales teams, services, and operations support staff who work with local small and medium businesses.

StoneCo Ltd has approximately 519,500 clients, mainly small- and medium-sized business and more than 15 integrated partners, which includes global payment service providers, digital marketplaces, and software vendors.

StoneCo Ltd’s Merger with Linx SA

On August 11, StoneCo Ltd announced it had signed a definitive agreement for STNE Participações S.A., a controlled company of STNE that holds the software investments business of the Stone group in Brazil, to merge its business with Linx, the largest software developer in retail management systems in Latin America. (Source: “Stone Enters Business Combination Agreement With Linx,” StoneCo Ltd, August 11, 2020.)

Linx is a leading tech company that develops and provides integrated software solutions to over 70,000 retail clients across more than 100,000 storefronts.

Analyst Take

StoneCo Ltd continues to dominate in its local fintech market. While the Brazilian banking system is dominated by its “Big Five” banks, there is a major effort underway by regulators to make it more competitive. This bodes well for StoneCo.

Even though the coronavirus pandemic hit the Brazilian economy hard, StoneCo performed well, with total payment volume increasing approximately 28% in the second quarter.

To capture more of the Brazilian market and make it more competitive, StoneCo announced the acquisition of Linex, a Brazilian retail software company. All of this makes it a fintech stock to watch.