Rising CBDC Adoption And Rigid Regulation Will Erode Brazil Payments

Key Takeaways

• Rising digital currency adoption and technological disruption threaten StoneCo's payment volumes and could make parts of its network obsolete.
  
• Growing regulatory burdens, credit risk exposure, and intense competition are likely to constrain revenue, margins, and the company's ability to innovate.
  
• Strong expansion in digital financial services, improved operational efficiency, and effective capital strategies position StoneCo for sustained growth and resilience across diverse revenue streams.

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.

• Accelerating adoption of Central Bank Digital Currencies in Brazil could severely undermine StoneCo's transaction volumes and core payment revenues, as these government-backed digital alternatives disintermediate third-party providers and potentially render large parts of StoneCo's network obsolete, jeopardizing future top-line growth.
  
• Intensifying regulatory scrutiny and escalating data privacy requirements in Brazil and globally are expected to drive compliance costs sharply higher, constraining StoneCo's ability to monetize customer data, limiting its capacity for product innovation, and exerting persistent pressure on net margins over time.
  
• The company's high reliance on Brazil's SMB segment exposes it to outsized credit risk and extreme earnings volatility during economic downturns or periods of tighter credit conditions, especially as higher global interest rates and sluggish consumer spending in emerging markets are likely to depress payment volumes and strain transaction-based revenue growth.
  
• Mounting competition from both local fintechs and established global payments giants is anticipated to drive aggressive pricing pressure across the sector, threatening StoneCo's revenue growth, eroding operating leverage, and compressing net income as sustained technological investment becomes a requirement just to maintain its current market position.
  
• The rapid pace of technological innovation in digital financial services-including the spread of open banking protocols and blockchain-based payment infrastructure-could rapidly diminish the value proposition of traditional payment facilitators like StoneCo, undermining customer retention, leading to declining average revenue per client, and increasing long-term competitive risk to both revenue and profitability.

StoneCo Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on StoneCo compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming StoneCo's revenue will grow by 4.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -9.2% today to 17.9% in 3 years time.
• The bearish analysts expect earnings to reach R$2.8 billion (and earnings per share of R$9.68) by about September 2028, up from R$-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 bearish analyst cohort, the company would need to trade at a PE ratio of 7.6x on those 2028 earnings, up from -20.1x 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 8.61%, as per the Simply Wall St company report.

StoneCo Future Earnings Per Share Growth

Risks

• StoneCo's sharpened focus on financial services targets over 90% of a total addressable market estimated at R$100 billion, while its current market share remains small, suggesting significant headroom for long-term revenue and earnings expansion.
  
• Consistently expanding its MSMB active client base-up 17% year over year to 4.5 million, with a 23% increase in banking clients and a 36% rise in client deposits-indicates strong secular demand for digital financial services, which could continue to drive both top-line and bottom-line growth.
  
• Accretive capital allocation strategies, including material share buybacks and potential return of excess capital from software divestitures, bolster per-share earnings and support higher net margins, directly benefiting shareholder value.
  
• Operational leverage is evident as selling and administrative expenses decrease as a percentage of revenues, while the business benefits from scale in technology and customer support, contributing to expanding net margins and sustainable earnings growth over time.
  
• A multi-product ecosystem with increasing cross-sell of banking, credit, and payment solutions-reflected in a 41% sequential increase in working capital disbursements and stable asset quality-enables StoneCo to improve average revenue per client and diversify revenue streams, supporting resilient revenue growth and net income even in a weaker macro environment.

Valuation

• The assumed bearish price target for StoneCo is $14.33, which represents the lowest price target estimate amongst analysts. 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be R$15.8 billion, earnings will come to R$2.8 billion, and it would be trading on a PE ratio of 7.6x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of $17.61, the bearish analyst price target of $14.33 is 22.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.