Technology Sector Ideas

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>>> StoneCo (STNE) is a leading provider of payment-processing services in Brazil. Admittedly, it's also been a provider of lending services that have heavily underperformed. While it occupies a very small position in Berkshire's total stock portfolio, the company has the distinction of being one of the few fintech companies that the investment conglomerate is invested in.


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In addition to macroeconomic pressures that have generally been quite hard on fintech stocks, StoneCo's valuation has been pressured due to bad debt held by its credit business. The company had been relying on Brazil's national registry system to guide its loan underwriting, and this created issues as the COVID-19 pandemic and other issues drove business failures and pushed the value of StoneCo's loan book into negative territory.

As a result of these challenges, the company's share price is down approximately 88% from its all-time high. But at current prices, the stock looks like a worthwhile buy for risk-tolerant investors.

At the end of the fourth quarter, StoneCo estimated that it still had 398.7 million Brazilian reals (roughly $79 million based on today's exchange rate) in bad debt on its books, but the company has discharged or sold off most of its bad debt. More importantly, its core payment-processing services segment continued to serve up strong results.

Primarily driven by its payments business, StoneCo managed to grow revenue 44% year over year in Q4. The company's non-GAAP (adjusted) net income also came in ahead of expectations at $46.4 million, up from a loss of $6.4 million in Q4 2021.

While the business has been growing at a rapid clip, it's still valued at roughly 18 times this year's expected earnings and 1.5 times expected sales. Based on its recent earnings trajectory, StoneCo's adjusted earnings could feasibly cover the remaining bad debt on its books this year, and the business still has plenty of room for growth ahead.

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