Bundled Payment Solutions And Efficient Funding Will Improve Future Performance

Key Takeaways

• Strategic expansion in the MSMB payments market and client engagement might boost revenue and net margins.
  
• Controlled credit portfolio expansion and efficient use of retail deposits could enhance earnings and reduce financial expenses.
  
• Macroeconomic headwinds, adoption impacts, and operational shifts pose challenges to revenue, margins, and earnings, with risks in credit growth and software segments.

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.

• StoneCo's strategy to outpace market growth and expand its share of the MSMB payments market, despite challenges, suggests potential revenue growth.
  
• The focus on enhancing client engagement through bundled payment and banking solutions highlights opportunities for increasing net margins by deepening relationships with clients.
  
• The successful credit portfolio expansion, while maintaining controlled risk, indicates potential growth in earnings, driven by disciplined pricing and credit product offerings.
  
• StoneCo's efforts to utilize retail deposits more efficiently to fund operations could lead to reduced financial expenses, potentially improving net margins.
  
• The ongoing share buyback program and future commitment to returning excess capital to shareholders could drive EPS growth, contributing positively to overall financial performance.

StoneCo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming StoneCo's revenue will grow by 11.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -11.9% today to 25.7% in 3 years time.
• Analysts expect earnings to reach R$4.5 billion (and earnings per share of R$15.46) by about April 2028, up from R$-1.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 4.8x on those 2028 earnings, up from -10.9x today. This future PE is lower than the current PE for the US Diversified Financial industry at 15.6x.
• 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

• The faster-than-expected adoption of PIX negatively impacted MSMB card TPV, missing guidance expectations, which could affect future revenue targets.
  
• Despite strong retail deposit growth, the shift to using deposits to fund operations will reduce floating revenue, impacting net margins and potentially earnings.
  
• The macroeconomic headwinds and an increasing yield curve resulted in higher financial expenses, potentially affecting net income if interest rates continue to rise.
  
• The recent impairment charge on the Software segment suggests challenges in that business, which, if unresolved, could hurt overall earnings.
  
• Executing credit growth in a challenging macroeconomic environment presents heightened risk, potentially impacting the credit quality and increasing provision expenses.

Valuation

• The analysts have a consensus price target of $13.277 for StoneCo based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $19.47, and the most bearish reporting a price target of just $6.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$17.4 billion, earnings will come to R$4.5 billion, and it would be trading on a PE ratio of 4.8x, assuming you use a discount rate of 8.6%.
• Given the current share price of $10.57, the analyst price target of $13.28 is 20.4% 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.