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Why Did StoneCo Tank 34% After Its Q3 Earnings Report?

StoneCo shares have dropped like a rock in 2021 — is this a short-term oversight or is there something incredibly wrong with the business?

StoneCo (NASDAQ: STNE) made a name for itself over the last couple of years, as it was made known that Warren Buffett’s Berkshire Hathaway held a stake in the company. StoneCo was one of the biggest gainers in 2020, but fast-forward to now and it’s come to a halt; it has been one of the worst-performing stocks of 2021.

What does StoneCo do?

StoneCo is a Brazilian fintech business powering small and medium-sized businesses for everything from payments solutions, point of sale, credit facilities, as well as software and workflow services.

StoneCo’s Q3 Results

Total payment volume (TPV) grew 53.6% year-over-year (YoY), StoneCo’s payment client base doubled YoY, and its banking accounts more than quadrupled from the year prior. Consolidated software revenue was up a whopping 16.7x from last year, with a 99% retention rate.

But unfortunately, StoneCo reported a write-down of $230 million on the fair value of investments. 

What’s the real issue?

Those earnings looked great! What’s going on?

Well, StoneCo’s credit portfolio is showing signs that debtors aren’t paying up, which leads to non-performing loans, defaults, and delinquencies, all of which will be StoneCo’s responsibility. 

Sounds kind of familiar doesn’t it?

StoneCo is based out of Brazil, and the country is experiencing extreme inflation right now — it was 10% in October 2021, and it is continuing to grow — this is the highest rate of inflation Brazil has experienced since 2003. Consumers say “each week you go for groceries there are different prices” so there’s a lot of uncertainty about how long this will continue.

Political turmoil swept the nation in recent years which has only added fuel to the fire, and it looks like Brazil could be headed towards recession — which is where StoneCo’s real problem is.

This is a great example of why investors should always geographically diversify investments, and if you want to read more about geographic diversification, you can read this article. 

Is it a good time to buy StoneCo?

“When there’s blood in the streets,” as they say.

This could be an opportunity for the patient investor. StoneCo has seen an almost 6-fold increase in its client base and a 3.5x increase in total payment volume since its 2018 IPO, and now has 422,000 banking clients, as well as over 200,000 software clients. We can see this business has shown solid growth since its public debut and it’s getting hit hard because of outside factors, but the overall business model is solid. 

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