Digital Payments Will Advance Brazil's SMEs Digitization And Banking Integration

Key Takeaways

• StoneCo's focus on MSMB payments, digital banking, and technology innovation positions it for rapid client growth, share gains, and operating leverage in an underpenetrated market.
  
• Regulatory trends and fintech adoption support StoneCo's ability to expand bundled services and diversify revenue, driving sustained profitability above industry standards.
  
• Sluggish transaction growth, fierce competition, disruptive payment technologies, and rising costs threaten StoneCo's pricing power, profitability, revenue prospects, and resilience in a challenging market.

Catalysts

Provides financial technology and software solutions to merchants and integrated partners to conduct electronic commerce across in-store, online, and mobile channels in Brazil.

• Analyst consensus sees StoneCo's sharpened focus on MSMB payments and core financial services as a growth driver, but this shift-combined with a materially underpenetrated addressable market and now unlocked capital from software divestitures-could accelerate client acquisition and share gains at rates far above current expectations, lifting top-line revenue by multiples over the medium term.
  
• While consensus highlights improvements in net margin from efficiencies and cross-selling, a more bullish view sees sustained deposit growth and full banking integration enabling proprietary, ultra-low-cost funding at increasing scale, which could structurally re-rate net margins and drive prolonged, outsized earnings expansion.
  
• With digital payments, banking and credit adoption still in early phases across Brazil's MSMBs and smartphones proliferating rapidly, StoneCo is uniquely placed to capture a wave of first-time digitization among millions of cash-based enterprises, creating an exponential and compounding network effect on both TPV and recurring fee revenue.
  
• The company's technology-driven model and accelerating platform development give it a decisive cost and innovation advantage versus banks, enabling continuous product launches, deeper ecosystem integration, and new monetization streams that could boost operating leverage and ROE well beyond prevailing industry norms.
  
• Regulatory momentum favoring open banking and fintech innovation in Brazil will disproportionately benefit scaled, capitalized players, allowing StoneCo to rapidly develop and distribute new bundled services to the underbanked, opening significant new avenues for revenue diversification and multi-year EPS growth.

StoneCo Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on StoneCo compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming StoneCo's revenue will grow by 11.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -9.2% today to 32.4% in 3 years time.
• The bullish analysts expect earnings to reach R$6.2 billion (and earnings per share of R$17.36) by about September 2028, up from R$-1.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 5.7x on those 2028 earnings, up from -20.5x today. This future PE is lower than the current PE for the US Diversified Financial industry at 16.5x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.6%, as per the Simply Wall St company report.

StoneCo Future Earnings Per Share Growth

Risks

• Slowing transaction volumes and lower same-store sales growth among micro, small, and medium-sized business clients, especially in a tough macroeconomic environment with higher interest rates, may constrain StoneCo's ability to grow revenues and maintain double-digit top-line expansion in the long run.
  
• Intensifying competition from both global players and aggressive local fintechs as well as commoditization of payments processing services could erode StoneCo's pricing power, forcing reductions in take rates and putting pressure on gross margins and profitability.
  
• The increasing use and national adoption of alternative real-time payment systems such as PIX and the potential emergence of central bank digital currencies threaten to disintermediate traditional payment processors, which could reduce StoneCo's addressable market and impact revenue growth and margins.
  
• Exposure to small and medium-sized businesses in Brazil makes StoneCo particularly vulnerable to credit losses and a worsening macroeconomic backdrop, increasing the risk of higher provisions and non-performing loans that can negatively impact net income and return on equity over time.
  
• Rising regulatory scrutiny, data privacy demands, and the ongoing need for technology investment due to cybersecurity threats can drive up compliance and operational costs, leading to persistent margin pressure and lower net earnings growth.

Valuation

• The assumed bullish price target for StoneCo is $23.25, which represents two standard deviations above the consensus price target of $17.64. This valuation is based on what can be assumed as the expectations of StoneCo's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $24.96, and the most bearish reporting a price target of just $14.33.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be R$19.0 billion, earnings will come to R$6.2 billion, and it would be trading on a PE ratio of 5.7x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of $17.85, the bullish analyst price target of $23.25 is 23.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.