Warren Buffett is one of the most successful investors in history, and he’s dispensed a lot of wisdom over his decades of guiding Berkshire Hathaway with incredible yields. Perhaps his most quoted investment advice is that it pays to “be scared when others are greedy and greedy when others are scared.”
With the uncertainty that has rocked the market recently, there is no shortage of companies that have seen their valuations fall precipitously from previous highs. However, one company in Berkshire Hathaway’s portfolio stands out for its particularly terrible performance lately. Read on to see why Warren Buffett’s worst performing stock since the start of 2021 actually looks like a smart buy right now.
This battered fintech was Berkshire’s biggest loser
StoneCo (STNE 2.10%) is a Brazil-based fintech that provides payment processing and credit services, primarily to merchants. While the stock has enjoyed a string of successes following its IPO in 2018, conditions have changed dramatically since the start of last year. Shares were crushed due to a combination of inflation, other macroeconomic headwinds and regulatory changes implemented by the Brazilian government, essentially cracking the company’s credit business.
StoneCo’s stock price is down about 90% from its peak, and the company faces big challenges. The graph below tracks StoneCo’s former credit portfolio and its estimated fair value in Brazilian reals from the first quarter of 2021 to the first month of its current fiscal year.
StoneCo managed to sell off some troubled parts of its credit portfolio, but management still believes more than half of its legacy portfolio is bad. Due to new regulatory standards, the company has suspended lending to small and medium-sized businesses and ultimately could be required to pay somewhere in the range of 450 million Brazilian reals (about $90 million) in loans. that end up not being reimbursed.
Down, but not out
StoneCo’s credit segment is in bad shape. On the other hand, its payment processing business continued to onboard new merchant partners and grow total payment volume (TPV) at an encouraging pace. The charts below track StoneCo’s merchant payment customers, POS on its platform, and revenue over the past two years.
While StoneCo is still benefiting from a small increase in payment volume thanks to the coronavirus stimulus program in Brazil, overall POS has grown at an impressive rate over the past year, and the growth looks even more impressive if the program contribution is cancelled. Even better, the total number of active customers for its payment processing ecosystem more than tripled year-over-year (YOY) in the fourth quarter of last year.
The company has also entered the business management and human resources software sector with its acquisition of Linx. Linx’s revenue grew 17.7% year-over-year in the fourth quarter, and non-unit software services revenue increased approximately 82% to push total software segment revenue up 26, 4% YoY. Through a combination of synergies with the Stone Financial Platform, the integration of other software services with Linx, and increased discipline in managing spend, the company is seeing margins in the software segment increase significantly this year.
StoneCo’s credit business is clearly not in great shape, and the company is on track to significantly reduce bad debts. On the other hand, its payment processing and enterprise software segments still have strong growth potential, and the stock currently appears to be priced conservatively.
StoneCo is cheap and could benefit from big trends
With approximately 215 million inhabitants, Brazil is the most populous country and the largest economy in Latin America. While Brazil has seen a rapid increase in the adoption of e-commerce and card and mobile payments in recent years, the overall adoption of these services remains at an early stage compared to the United States, Europe and the United States. Asia.
After a rush sale, StoneCo now has a market capitalization of around $3 billion and is valued at around 1.6 times this year’s expected sales and 26.5 times this year’s expected earnings. With the shift to card and app payments and the rise of e-commerce continuing to heat up in Brazil and Latin America as a whole, this downed fintech stock could have a big advantage at current prices.