What Is StoneCo Ltd., And Why Is Berkshire Hathaway Invested In It?

04-Jan-2019

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It’s no surprise that the investment decisions Warren Buffett makes send ripples (or, in some cases, shockwaves) throughout the broader financial world. The billionaire guru and leader of Berkshire Hathaway has a reputation for his shrewd decision making, and everyone from casual to professional investors often looks to him for unofficial guidance on how to use their money. So, when news broke in late October that Buffett’s conglomerate was making a sizable investment into a company called StoneCo Ltd. (STNE), investors around the world took notice. However, StoneCo has not been especially prominent up to the time that Berkshire’s news broke, so there remains confusion about what the company is and why Berkshire may have taken a chance on it. Below, we’ll explore what this Brazilian fintech company does and take a look at what about it may have appealed to Buffett.

According to a prospectus filed with the U.S. Securities and Exchange Commission and related to StoneCo’s October 25, 2018, initial public offering (IPO), the company’s genesis dates back to 2012. The founders of the company, André Street and Eduardo Pontes, had already spent over a decade working in electronic payments and payment processing in Brazil, the result of which was a company called Braspag, which they describe as “the country’s leading online payments gateway at that time.” In response to new regulatory frameworks initiated by the Central Bank of Brazil, as well as the continued development of Brazilian entrepreneurship opportunities and other changes to the market, Braspag’s founders moved to “build a new business from scratch.”

Street and Pontes point to three tenets of StoneCo, put in place at the company’s founding: technology, human connection, and proximity. StoneCo’s services and platform aimed to generate a user experience with maximum accessibility and to allow customers ease of interaction with the StoneCo team. Further, StoneCo states that “we believe that the only true way to understand the needs of merchants is to stay close” geographically, too.

Scale, Growth, and Margin

Prior to its IPO, StoneCo indicated in its filing with the SEC that it has achieved impressive growth, margin expansion, and scale in just a few short years. The company claimed total revenue and income of $636 million Brazilian Real (a little less than $160 million USD) for the first quarter of 2018, as well as a valuation of $6.1 billion (about 22 times the company’s revenue for the trailing 12 months.

StoneCo claims to have captured more than 5.5% of market share for Q2 2018 in the Brazilian market, with more than 230,000 clients as of the third quarter of the year. Beyond that, StoneCo touts total income and revenue growth of 92% from the first quarter of 2017 to the same period a year later, and adjusted net income growth of 425% for the same period. All told, the company has experienced exceptional top-line growth at a rate that is accelerating, and it is currently the fourth-largest payment processor in the country of Brazil on the basis of volume.
Berkshire’s Interest

With such impressive numbers achieved across a short history, it’s perhaps no surprise that StoneCo drew the attention of eagle-eyed investors at Berkshire Hathaway. Indeed, Warren Buffett’s company indicated a plan to purchase more than 14 million shares at the IPO price, per the filing with the SEC.

Nonetheless, Berkshire has long been known for its focus on blue-chip stocks and predictable, steady companies including insurance companies and utilities. A major investment in a largely untested fintech company marks a shift for Buffett and his team, particularly because of Buffett’s known distrust for IPOs. According to the Wall Street Journal, in 2012, at Berkshire’s annual meeting, the business leader suggested that “out of thousands and thousands and thousands of businesses in the world…[an IPO] can’t be the most attractive thing” if for no other reason than the fact that sellers have an advantage in deciding when to enter the market.

Perhaps at least in part because of Berkshire’s investment, StoneCo has quickly risen to a position of prominence since its IPO. The Wall Street Journal reported that STNE shares rose by 30% in the first two days of trading, although it has since fallen as of this writing.

https://www.investopedia.com/tech/what-stoneco-ltd-and-why-berkshire-hathaway-invested-it/

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