New Trade for February 6th, 2023

Amid rising interest rates and a drastic rotation out of technology, fintech stocks have taken a beating recently, vastly underperforming the overall market. Many fintech names are also feeling the pressure from the recent plunge in digital currency prices resulting from the FTX bankruptcy.  Meanwhile, competition in the space is intensifying as a wave of fintech startups aim to draw in merchants.  

Nevertheless, the shift in consumer spending habits to online and mobile platforms is undeniable.  Expansion of the adoption of contactless payment and the growing popularity of “buy now, pay later” transactions should serve as significant tailwinds for the strong names in the industry. 

With a potential rebound for fintech stocks on the horizon in 2023, many investors are considering stocks from the group that have had their prices recently slashed. In today’s trade alert, we’ll discuss a fintech name that’s gaining the attention of institutional brokers and retail investors alike.    

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StoneCo Ltd. (STNE) provides back-office software, loans, and other financial services to small and medium-sized businesses with a focus on reinvesting the cash it generates to acquire or build new financial products for its customer base.  Since early 2019, the company has grown the number of small and medium business clients by 3x, revenue by 2.3x, and net income by 2.2×. 

Stoneco has developed a range of payment solutions utilized by e-commerce for businesses and merchants all over Latin America. In the third quarter, Stoneco reported about $390 million in revenue and earnings. Small and medium-sized businesses using the platform surpassed 2.3 million, and total payment volume in the quarter also grew to close to $14 billion.

Stoneco stock is down close to 87% from its peak on news of rising interest rates, macroeconomic risks in Brazil, and some operational blunders. But base interest rates in Brazil seem to have peaked, and a potential decline in the second half of 2023 is expected as Brazil’s inflation normalizes, reducing the margin pressure from rising financial expenses. Meanwhile, StoneCo‘s revenue growth should benefit from rising digitization of payments, higher take rates, and elevated growth in banking and software.  STNE stock currently trades at roughly 1.4 times projected forward revenue and 33 times forward earnings, which seems fair for a disruptive, fast-growing company in a developing market.  

Some prominent institutional investors have recently taken a shine to STNE.  At the end of the third quarter, Berkshire Hathaway disclosed a new $110 million position in the company.  Cathie Wood’s Ark Innovation fintech exchange-traded fund (ARKF) also owns roughly 2.55 million shares of the payments company valued at more than $26.5 million.  STNE has a Hold rating from the pros who cover it and a median target price of $12.20, representing a 32% increase from Friday’s closing price.