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Stoneco Ltd Cl A(STNE-Q)
NASDAQ

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1 Warren Buffett Stock Down 90% to Buy Now and Hold Forever

Motley Fool - Wed Oct 18, 2023

StoneCo(NASDAQ: STNE) is a Brazilian fintech specialist that offers payment processing and other services to small and medium-sized businesses. The company had its initial public offering (IPO) in October 2018, and shortly after, Berkshire Hathaway disclosed that it had initiated a position in the stock.

Although StoneCo accounts for a minuscule portion of the conglomerate's equity portfolio and has been beaten down in recent years, it could be one of the most explosive stocks owned by Warren Buffett's company from here, and a great buy right now.

StoneCo stock offers explosive upside

StoneCo's hardware and software make it easy for businesses to accept card and app-based payments at physical locations, and to process sales through e-commerce portals. The company also has a software business that combines point-of-sale services, customer relationship management, and enterprise resource planning offerings.

Previously, StoneCo also operated a lending business that was a significant contributor to its overall performance, but this unit suffered a dramatic collapse due to pandemic-related challenges and other pressures.

Many small businesses closed during the pandemic, of course. But in addition, the fintech had been using inadequate data (provided by Brazil's national registry system) to assess its clients' creditworthiness. Factor in the impact of a new regulatory framework that Brazil launched in June 2021, and the final result was that the fintech specialist wound up with a seriously distressed loan portfolio. StoneCo had to eat millions of dollars of losses as it wrote off many loans and sold others to third parties at bargain-basement levels.

Along with broader macroeconomic pressures that have seriously depressed valuations across the fintech industry, the struggles of StoneCo's credit business spurred a huge and extended sell-off for the stock. StoneCo's share price is now down roughly 90% lower than the high it reached in February 2021, and about 59% below its IPO price. But it's flashing buy signals for risk-tolerant investors on the hunt for big returns.

STNE PE Ratio (Forward) Chart

Data source: YCharts.

Trading at just 12.6 times this year's expected earnings and 1.3 times expected sales, StoneCo would look cheaply valued even if its sales and earnings just held steady at current levels. But the company is actually increasing revenue and profit at a rapid pace.

Impressive business performance and receding challenges

In the second quarter, strong momentum for StoneCo's payments business pushed its overall revenue up 28% year over year to 3 billion Brazilian reals -- or roughly $600 million based on the exchange rate as of this writing. Non-GAAP (adjusted) net income in the period rose 477% year over year to 322 million reals -- or roughly $64 million. Admittedly, StoneCo's explosive earnings growth partly stemmed from the fact that it started with a low basis of comparison, but it looks like the business has turned a corner.

STNE Revenue (TTM) Chart

Data source: YCharts.

The negative financial impacts of the meltdown of its credit unit are now largely in the rear-view mirror. After completing a restructuring of the unit, StoneCo has actually started to slowly ramp up its credit offerings again. But even if the cautious return to lending for small and medium-sized businesses winds up bearing little fruit, the company's payments business continues to post great results.

Macroeconomic volatility in Brazil and the potential for a bearish shift in the broader stock market are risk factors that could push StoneCo lower, but the stock looks attractively valued for risk-tolerant investors right now. If you're willing to embrace some volatility, StoneCo has the makings of a potentially massive long-term winner.

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Keith Noonan has positions in StoneCo. The Motley Fool has positions in and recommends Berkshire Hathaway and StoneCo. The Motley Fool has a disclosure policy.

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