Why StoneCo Is Not A Good Deal Right Now (NASDAQ:STNE)

Bullish investor sentiment in StoneCo (NASDAQ:STNE) rewarded investors with a return that beat the S&P 500 index (SPY) by more than six-fold. In the last quarter, readers who bought the stock on the buy recommendation might want to wait for the next earnings report. More noticeable is the stock stalling in the low $50s. What will it take for the stock to dip, if at all?

Strong Q1 Results

StoneCo is up 26% in the last quarter:

Data courtesy of SA Premium

The Warren Buffett-backed investment proved its worth. StoneCo’s active client base grew 73.9% year on year to 531,300. Its net cash grew 43% Y/Y, while its current liquidity ratio improved to 1.7 times, up from 1.55 times in Q4/2019. Investors gravitate towards companies with strong liquidity, especially those operating primarily in less certain geography of Brazil. The company put its money to good use through the Linx deal. Plus, it sold 27.375M common shares at $47.50 a share.

Markets did not react at all to the stock dilution. This is a worrisome sign.

Stock Sale

Companies that sell shares to fund acquisitions or to invest back in the company usually get punished in the near-term. Still, NIO (NIO) sold stock on at least two occasions in the last year for such reasons. The stock dipped each time but continued its uptrend.

For StoneCo, the follow-on offering signaled a strong appetite for shares. It also suggested that investors are confident that the combination agreement with Linx will pay off.

Stone rationalizes the Linx acquisition will accelerate the firm’s mission of “empowering Brazilian merchants of all sizes to manage their businesses more effectively through technology.” It will do so by giving Linx’s 70,000 clients with access to StoneCo’s offerings. For example, they will get financial services and customer support, payment technology, all in an integrated solution.

StoneCo’s mission of targeting the small and medium business (“SMB”) will complement Linx’s vertical solutions.

Giving merchants digital commerce options – website, online marketplaces, and social media apps – to companies reliant on the physical offline business is transformational. Now that the Covid-19 pandemic risks are accelerating with the flu season upon us, investors are betting that StoneCo’s growth will improve, too.

Opportunity to Buy at a Dip is Absent

Buying StoneCo when it dipped no longer works today. The stock nearly doubled from the March – April sell-off and did not look back:

Chart courtesy of finbox

Even as the technology-led correction pulled other sectors lower, StoneCo stock is not falling.

Smplywall.st characterizes StoneCo’s strong prospects while noting its lack of value and no quarterly dividends:

Source: https://simplywall.st/

Similarly, SA Premium scores the stock’s value with a grade of an F:

Data courtesy of SA Premium

In a previous article and the DIY Value Investing Marketplace (subscription service only) stock search for value, PagSeguro Digital (PAGS) is a potential alternative to buying STNE stock.

Alternative Investment: PagSeguro

PagSeguro has a better growth score. It also has higher profitability and value scores than StoneCo, albeit not by much. Last month, PagSeguro acquired wirecard MOIP, which gives it the “most complete online solutions in payments and digital banking.” Investors want to own companies having the biggest fintech platforms. Wirecard MOIP online solutions would strengthen PAGS’s presence in online transactions. So, why does PAGS have a smaller market cap of $12 billion compared to the $16.4 billion market cap with StoneCo?

PAGS sees its total addressable market expanding:

If the company delivers on growing digital transactions and beating StoneCo, then StoneCo’s stock is at risk of dipping. Alternatively, PAGS stock may bounce back to the $48.22 high:

Fair Value on STNE Stock

Investors may build a five-year DCF Model: Revenue Exit. Assuming a cautious discount revenue of 10.5%, the stock trades at fair value.

Scenario 1

Data courtesy of Finbox

The fair value assumes revenue growth in the 20% to ~42% annually:

Readers are encouraged to modify the metrics used and to come up with another fair value target.

StoneCo is trading in a holding pattern. Another leg down in the technology sector may shake investor confidence. If that happens, it creates another buying opportunity for those who missed the 195% return from yearly lows.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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