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Stoneco Ltd Cl A(STNE-Q)

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This Fintech Thinks Its Own Stock Is Cheap

Motley Fool - Fri Oct 6, 2023

Earlier this week, StoneCo(NASDAQ: STNE) announced a new 300 million Brazilian real (roughly $58.2 million) repurchase authorization. Shares closed up around 2% on Wednesday in response -- slightly larger than the repurchase plan's size relative to StoneCo's roughly $3.2 billion market cap as of this writing.

While it might be tempting to argue this buyback is insignificant or even ill advised, I think it's a great sign for patient, long-term investors willing to watch StoneCo's growth story play out.

But why?

The reasons for buybacks

First, some broad perspective is in order: Share repurchase programs are typically implemented for a combination of two reasons: To offset dilution from shares issued through stock-based compensation, and/or because management believes (whether right or wrong) that its own company's stock is cheap. Alternatively, companies have the option to allocate capital to things like dividend payments, funding acquisitions, paying off debt, or investing to drive organic growth through incremental R&D or sales and marketing spending.

So -- assuming a given company is operating from a position of strength and one of the alternative capital-allocation options isn't obviously more attractive -- the market generally views repurchase programs in a positive light.

In this case, recall the last time StoneCo announced a meaningful buyback authorization in May 2021. The fintech leader most recently repurchased a little over $53 million in shares under that authorization during the second quarter of 2022, when the stock traded at prices ranging from $8 to $12 per share. With shares currently trading around $10 at this writing -- down sharply from its August 2023 high of nearly $15 per share -- the timing of this week's new repurchase authorization is no coincidence.

The case for StoneCo's repurchase plan

Indeed, StoneCo appears to be operating from just such a position of strength, generating positive net income of 532.9 million Brazilian real ($103 million) in the first half of 2023 while watching its adjusted net cash position swell 57.1% year over year last quarter to 4.327 billion real ($837 million). In fact, management noted in the company's latest quarterly earnings release (published in mid-August) that the company's swelling cash position was the result of a "strategic decision [...]" to conservatively manage StoneCo's balance sheet during the period. As for the reasoning for that conservatism, we can likely point to StoneCo's turnaround efforts and repricing initiatives for its micro-, small-, and medium-sized business (MSMB) clients over the last several quarters aimed at offsetting increased costs from rising interest rates in the country.

StoneCo is also actively working to relaunch its credit product for small businesses, which was previously put on hold in 2021 due to losses endured from the glitchy launch of the Brazilian Central Bank's new financial registry system.

As I argued in a separate article a few days ago, however, StoneCo appears to have ironed out the hiccups in its credit product, and it will soon enjoy a significant tailwind as Brazil's central bank has begun a rate-cutting cycle that (barring any meaningful uptick in inflation that might convince them otherwise) should be slated to continue for at least the next several quarters.

I think StoneCo management sees the optimistic writing on the wall for its business, so finally felt comfortable paring back its previous conservative cash-management strategy, starting with this week's repurchase authorization.

That doesn't guarantee, of course, that StoneCo's leaders will ultimately be proven right in being more aggressive with capital allocation through resumed buybacks. But with shares of StoneCo down 30% in two months even after posting second-quarter results that easily beat Wall Street's expectations, I can't help but agree that the stock looks like a bargain right now.

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Steve Symington has positions in StoneCo. The Motley Fool has positions in and recommends StoneCo. The Motley Fool has a disclosure policy.

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