Dynamic Client Solutions And Efficiency Initiatives Drive Promising Earnings Growth

Key Takeaways

• Enhanced client engagement and cross-selling strategies are driving future revenue growth and deeper client relationships.
  
• Efficient capital management and cash-generating initiatives contribute to improved net margins, earnings growth, and potential EPS growth through share repurchases.
  
• Shifts to PIX payments, interest rate hikes, and focus on profitability present revenue and margin risks despite efforts to balance growth and credit management.

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 is enhancing client engagement by developing additional solutions like savings products, contributing to future revenue growth through increased cross-selling opportunities and deeper client relationships.
  
• The company has experienced significant growth in demand deposits and credit, with credit performing better than expected in terms of non-performing loan levels, which should positively impact net margins and earnings.
  
• The company has implemented a structured decision-making framework for capital management, allowing for potential shareholder value maximization through activity like share repurchases, which could drive EPS growth.
  
• StoneCo's cross-selling of financial services to software clients is showing positive trends, indicating potential future revenue expansion as card TPV growth among these clients exceeds overall MSMB volumes.
  
• The company is committed to executing efficiency and cash-generating initiatives, demonstrated by increased EBITDA margins and decreased administrative expenses, positioning it for improved net margins and earnings growth.

StoneCo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming StoneCo's revenue will grow by 13.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.7% today to 19.6% in 3 years time.
• Analysts expect earnings to reach R$3.5 billion (and earnings per share of R$10.01) by about November 2027, up from R$2.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 2.0x on those 2027 earnings, down from 9.0x today. This future PE is lower than the current PE for the US Diversified Financial industry at 18.5x.
• Analysts expect the number of shares outstanding to grow by 6.02% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.75%, as per the Simply Wall St company report.

StoneCo Future Earnings Per Share Growth

Risks

• The shift from card transactions to PIX payments, which could cannibalize debit volumes, may impact StoneCo's transaction revenue, although it currently has a similar take rate to card payments.
  
• Execution risks in further engaging the Linx sales force for software and financial service cross-selling could affect StoneCo's revenue if not managed properly.
  
• The company's decision to refocus on profitability could slow market share growth and revenue expansion as a result of prioritizing high-quality client acquisitions over mere quantity increases.
  
• The firm's approach to managing credit provisioning, despite the rise in 90-day NPL levels, may still underrepresent expected losses, which poses a risk to future net margins and earnings.
  
• Increases in Brazilian interest rates, potentially rising further, could lead to necessary price adjustments that might not be fully realized, thus impacting StoneCo’s net margins and bottom line over the short term.

Valuation

• The analysts have a consensus price target of R$15.91 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 R$19.93, and the most bearish reporting a price target of just R$6.77.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be R$18.1 billion, earnings will come to R$3.5 billion, and it would be trading on a PE ratio of 2.0x, assuming you use a discount rate of 7.8%.
• Given the current share price of R$10.7, the analyst's price target of R$15.91 is 32.8% 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.