São Paulo, Brazil-based financial technology solutions provider StoneCo Ltd. (STNE) offers an end-to-end, cloud-based technology platform to merchants and integrated partners to conduct electronic commerce across in-store, online, and mobile channels in Brazil. Since its IPO in 2018, the company has grown its client base 5.9 times with more than 422,000 banking clients and 200,000 software clients. 

But its shares have tumbled 24.8% in price year-to-date and 26.5% over the past month. The stock is now trading 86.7% lower than its 52-week high of $95.12, indicating a downtrend trend.

With Brazil’s economic damage increasing as inflation, lower consumer spending, and supply chain woes continue to hurt its recovery from the COVID-19 pandemic, investors are pessimistic about the stock’s prospects. In addition, STNE’s higher financial expenses and stretched valuation make the stock’s near-term growth prospects look bleak.

Here is what could influence STNE’s performance in the near term:

Macroeconomic Challenges

Brazil’s slide back into economic recession in the third quarter of 2021 after emerging from the pandemic has fostered more volatility in the market. Recently, Felipe Guerra, a founding partner at hedge fund manager Legacy Capital, said, “The outlook for emerging markets is challenging, and Brazil has a bad inflation history.” As interest rate hikes and inflation outbreaks sour investor sentiment, STNE’s business, which is hugely reliant on the Brazilian economy, could take a hit.

Class Action Lawsuits

In December 2021, Kuznicki Law PLLC, The Law Offices of Frank R. Cruz, and the Schall Law Firm announced a class action lawsuit against STNE for alleged violations of federal securities laws. In addition, law firms including Bronstein, Gewirtz & Grossman, LLC, and Robbins Geller Rudman & Dowd LLP have filed a class-action lawsuit against certain of STNE’s top officials. This could lead to a further slump in the company’s stock price in the near term.

Weak Financials

For the third quarter ended Sep/30, 2021, STNE’s adjusted net income declined 53.9% year-over-year to R$132.7 million ($25.30 million). Its key accounts TPV stood at R$23.4 billion ($4.46 billion), down 43.4% from the prior-year period. STNE reported a R$330.7 million ($63.05 million) net financial expense, representing a 411.3% increase year-over-year. The company’s adjusted EBITDA fell 8% from the prior-year quarter to R$473.3 million ($90.76 million).

STNE’s 0.1% trailing-12-month asset turnover ratio is 83.2% lower than the 0.6% industry average. And its trailing-12-month net income margin, ROE, and ROA are negative 6.7%, 1.7%, and 0.6%, respectively.

Premium Valuation

In terms of forward non-GAAP P/E, STNE is currently trading at 75.14x, which is 258.6% higher than the 20.96x industry average. In addition, the stock’s 9.68x forward non-GAAP PEG is 533.3% higher than the 1.53x industry average. STNE’s 30.70 forward EV/EBIT ratio compares with the 17.81 industry average.

Unfavorable POWR Ratings

STNE has an overall F rating, which translates to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. STNE has a D grade for Growth and Value. The stock’s weak growth prospects and premium valuation are reflected in these grades.

Also, it has an F grade for Stability, which is consistent with the stock’s relatively high beta of 2.32.

In addition to the grades I have highlighted, one can check out additional STNE ratings for Sentiment, Quality, and Momentum here.

STNE is ranked #165 of 166 stocks in the F-rated Software – Application industry.

Click here to check out our Software Industry Report for 2022

Bottom Line

Analysts expect STNE’s EPS to decline 75% year-over-year to $0.03 in the quarter ending March 31, 2022. Even though substantial growth in its banking and software client base has boosted its operational performance, given that the Brazilian economy is battling high-interest rates and inflation, it could still be a long time before the company can generate sustainable growth. So, we believe it is wise to avoid the stock now.

How Does StoneCo Ltd. (STNE) Stack Up Against its Peers?

While STNE has an overall F (Strong Sell) rating in our proprietary rating system, one might want to check out its industry peers with A (Strong Buy) ratings: Commvault Systems, Inc. (CVLT), SS&C Technologies Holdings, Inc. (SSNC) and Rimini Street, Inc. (RMNI).

STNE shares fell $0.11 (-0.87%) in premarket trading Monday. Year-to-date, STNE has declined -24.79%, versus a -7.26% rise in the benchmark S&P 500 index during the same period.

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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