StoneCo: Expect Further Consolidation Amidst Solid Financial Health (NASDAQ:STNE)

StoneCo Ltd. (NASDAQ:STNE) has demonstrated a solid financial performance in Q2 2023 earnings. The firm’s growth in revenue and income is notably driven by an expansion in its financial services platform and a rise in software platform revenues. StoneCo’s Adjusted EBITDA and Adjusted Net Income have witnessed remarkable growth, underlining the company’s operational prowess and healthy profitability. The company is scheduled to release its Q3 2023 earnings on November 10, 2023, with anticipated favorable results. This article delves into StoneCo’s financial health and the technical trajectory of its stock to identify future trends and potential investment avenues for long-term stakeholders. Current observations indicate that the stock price consolidates at diminished levels without immediately indicating an upward shift. The market will likely stabilize at these lower levels before an upward movement.

A Look into StoneCo’s Remarkable Q2 2023 Earnings and Upcoming Projections

StoneCo reported a total revenue and income of R$2,954.8 million, marking a 28.2% increase year over year. This surge was attributed to two main drivers: a 32.0% growth in their financial services platform revenues, which amounted to R$2,551.2 million primarily due to superior TPV growth in the Micro and SMB clients (MSMB) segment, and a 9.2% ascent in software platform revenues, reaching R$382.9 million, propelled by organic growth in Core POS and ERP solutions.

StoneCo’s financial health is further illustrated by Adjusted EBITDA for Q2 2023, which stood at R$1,498.8 million. This is a significant 46.0% increase from the previous year and a 19.8% increase from the previous quarter. Concurrently, the Adjusted EBITDA Margin surged by 4.6 percentage points sequentially to reach 50.7%. This enhancement was mainly due to a higher sequential total revenue and income, barring other financial income, and a continuous realization of operational leverage spanning costs and expenses. Moreover, the company’s Adjusted EBT for the same quarter was R$447.0 million, a monumental rise of 489.3% year over year and 38.0% quarter over quarter. The Adjusted EBT margin witnessed a boost, increasing by 3.2 percentage points sequentially to 15.1%. The foundation for this margin expansion was the consolidated revenue growth and cost improvements, aided by operational leverage across all expense lines, although offset partly by elevated financial expenses.

Furthermore, the Adjusted Net Income in Q2 2023 was reported at R$322.0 million, 476.9% higher than the previous year, with a net margin of 10.9%. This showcases a progression from R$236.6 million with a margin of 8.7% in Q1 2023. On the liquidity front, StoneCo’s Adjusted Net Cash position by the end of Q2 2023 was R$4,327.2 million, marking a 57.1% increase year over year and 8.5% growth quarter over quarter. The sequential rise of R$338.4 million can be traced back to cash net income inflows, inflow from labor, and social security liabilities, which were partly counteracted by capex and M&A expenditures.

In terms of future endeavors, StoneCo Ltd. has declared a share repurchase program. As of September 21, 2023, the company’s Board of Directors has sanctioned the repurchase of up to R$ 300 million in outstanding Class A common shares. This initiative will depend on various factors, including market conditions and regulatory considerations. Additionally, StoneCo has revealed plans to overhaul its management structure. This restructuring aims to more accurately align the company with tailored strategies for each client segment and to expedite the fusion of its software and financial solutions. Such a pivotal restructure underscores the commitment to centering clients in its business operations, promoting greater responsibility, enhanced results, and optimal value delivery.

StoneCo is scheduled to announce its Q3 2023 financial earnings on November 10, 2023, and projects its total revenue and income to surpass R$3,075 million for Q3 2023, translating to a year-over-year growth of more than 22.6%. Moreover, the company expects Adjusted EBT to exceed R$470 million in Q3 2023, compared to the R$447.0 million reported in Q2 2023. Also, MSMB TPV is expected to be between R$87 billion and R$88 billion, marking a 16.4% to 17.8% growth yearly.

The Dynamics of Price Stabilization at Lower Level

Although StoneCo’s financial health is robust, its technical outlook remains fragile. The monthly chart for StoneCo displays a substantial consolidation within the $6 to $15 price brackets. This visualization highlights a distinct downward trajectory that began in 2021. During that period, StoneCo’s stock value took a notable dive. Several reasons contributed to this decline, with the rising competition in Brazil’s payment processing landscape, notably from players like PagSeguro Digital (PAGS) and Mercado Pago, being a key factor.

Moreover, StoneCo’s quarterly financial figures showed signs of deceleration in specific growth metrics, raising concerns about the company’s prospects among investors. Broader economic challenges in Brazil and global economic unpredictability further tainted the stock’s image. This mix of internal company challenges and broader external factors eroded investor confidence, resulting in a considerable decline in StoneCo’s stock price.

Nevertheless, 2022 witnessed the stock price undergoing substantial consolidation. Such consolidation could signify either price stability or the potential to remain subdued over an extended period. Recent declines in the market, specifically in August and September 2023, suggest the market might need more time to find a stable footing. This implies a potential for further consolidation.

To delve deeper into StoneCo’s bearish trend, the weekly chart elucidates the price consolidation that began in 2022. Notably, the 2021 price dip occurred after breaking a dominant bearish pattern around the $55 neckline. This suggests that the long-term price trajectory is predominantly downward, with no clear indications of a bottom reversal yet. A significant reversal indicator would be a monthly closure above the $20 mark, a critical long-term level highlighted by the red line in the weekly chart below. Closing above this threshold would validate the establishment of a base, signaling potential buy opportunities for long-term investors. The stock remains in a consolidation phase without clear signs of a reversal. Thus, it might be prudent for investors to remain patient and wait for confirmation.

Market Risk

StoneCo operates in the increasingly competitive Brazilian payment processing sector, facing mounting challenges from significant players like PagSeguro and MercadoPago. This competition could challenge StoneCo’s potential market share and revenue growth, affecting its overall profitability. Furthermore, the broader issues troubling the Brazilian economy and global economic uncertainties can lead to a decline in consumer spending. This, in turn, might directly impact StoneCo’s transaction volumes and revenues. With a significant portion of the company’s revenue coming from its financial services platform, especially the MSMB segment, any setbacks in this specific segment could disproportionately impact StoneCo’s overall performance.

From a financial market perspective, despite StoneCo’s robust financial metrics, its stock has been trapped in a bearish trend since 2021. Whether prompted by internal company factors or broader market pressures, this trend can hamper the company’s capital-raising capabilities and potentially tarnish its standing in the financial markets. While StoneCo has offered optimistic projections for Q3 2023, failing to meet these expectations could further diminish investor trust, leading to additional downward pressures on its stock.

From a technical perspective, StoneCo’s stock has yet to show definitive signs of a bottom reversal. Continued price consolidation or potential downturns can deter existing and prospective investors. The consolidation phase portrayed in the technical charts suggests that the stock might need additional time to find stable ground, which might make investors cautious. Moreover, being a player in the financial services realm, StoneCo is exposed to strict regulatory constraints. Any regulatory changes or instances of non-compliance can seriously impede the company’s operations.

Bottom Line

StoneCo has showcased robust financial performance in its recent reports, with significant growth in profitability. The company’s advancements can be credited to a notable expansion in its financial services platform and a boost in software platform revenues. The positive trend in StoneCo’s Adjusted Net Cash position and initiation of a share repurchase program further highlights its sound financial standing and optimistic future projections.

However, despite these promising fundamentals, StoneCo’s stock is in a consolidation phase stemming from an enduring bearish trend that began in 2021. Several factors contribute to this trend, including rising competition from formidable players, broader economic issues in Brazil, and global economic uncertainties. The technical analysis does not yet indicate an apparent bottom reversal for the stock, suggesting that investors might have to wait for more definitive signs of a turnaround.

In conclusion, while StoneCo Ltd. displays commendable financial health and growth potential, the prevailing technical and market challenges cannot be overlooked. Investors should await the stock price to finalize its bottom pattern and close the monthly candle above $20 before anticipating a robust market rally.