STNE - StoneCo Ltd

[Spekulatius]

I was long stne and still long a tracking position, but shifted to PAGS due to valuation.  Maybe not exiting after this drop as this seems like an over-response, but I think the market is close to valuing this correctly now.  The retail market in Brazil has 1 trillion in sales a year (source: https://www.statista.com/statistics/233086/total-of-retail-net-sales-in-brazil/).  I'd say 50% of sales roughly would be a target for payments processing.  The others are too big or do different things.  Although this is roughly in line with Squares TAM GPV over total US retail sales (see slide 8 here: https://d1g145x70srn7h.cloudfront.net/documents/investor-relations/presentations/2019-02-overview.pdf and google for total US retail sales), this is just a number I pulled out of my hat though keep in mind.  The take is roughly 2% for both (or will be 2% soon enough), and so they would generate 10 billion in revenue.  There margins are about 30%.  So that is about 3 billion which supports a combined market cap of 30 billion at a 10 multiple.  Discount it back 7 or so odd years and you get a combined MC for PAGS and STNE of about 15 billion which is where we are at.  Some things this model is missing, other competitors like Itau and Cielo.  Maybe fatter net margins as STNE is almost at 50% and they may gain more with scale.  But I think to first order combined the companies are approximately fairly valued IMO.

 

How do you account for Cielo as well as the banks that are also into payment processing. It looks like those won’t just roll over and take rate is you g down to the benefit of the customer. Both ITUB, Cielo as well as the other banks are well financed, so they can afford to compete on price to stem market share losses.

[vince]

I was long stne and still long a tracking position, but shifted to PAGS due to valuation.  Maybe not exiting after this drop as this seems like an over-response, but I think the market is close to valuing this correctly now.  The retail market in Brazil has 1 trillion in sales a year (source: https://www.statista.com/statistics/233086/total-of-retail-net-sales-in-brazil/).  I'd say 50% of sales roughly would be a target for payments processing.  The others are too big or do different things.  Although this is roughly in line with Squares TAM GPV over total US retail sales (see slide 8 here: https://d1g145x70srn7h.cloudfront.net/documents/investor-relations/presentations/2019-02-overview.pdf and google for total US retail sales), this is just a number I pulled out of my hat though keep in mind.  The take is roughly 2% for both (or will be 2% soon enough), and so they would generate 10 billion in revenue.  There margins are about 30%.  So that is about 3 billion which supports a combined market cap of 30 billion at a 10 multiple.  Discount it back 7 or so odd years and you get a combined MC for PAGS and STNE of about 15 billion which is where we are at.  Some things this model is missing, other competitors like Itau and Cielo.  Maybe fatter net margins as STNE is almost at 50% and they may gain more with scale.  But I think to first order combined the companies are approximately fairly valued IMO.

 

How do you account for Cielo as well as the banks that are also into payment processing. It looks like those won’t just roll over and take rate is you g down to the benefit of the customer. Both ITUB, Cielo as well as the other banks are well financed, so they can afford to compete on price to stem market share losses.

 

I know the question wasn't directed to me but Stne's operating metrics are accelerating after the initial competitive discounting.  It's still early but that is strong support for their claim of a superior value proposition.  However, deep discounting, in whatever form will most certainly affect their growth rate at some point but it looks to me like they have some very interesting opportunities in related products and services and opportunities outside Brazil as well.  I would absolutely be thinking about my business in a different way if I was an incumbent anywhere near Brazil's borders.  Also, I think it's important to note that the regulatory body may look at the latest competitive offer as anti-competitive.

[cameronfen]

I was long stne and still long a tracking position, but shifted to PAGS due to valuation.  Maybe not exiting after this drop as this seems like an over-response, but I think the market is close to valuing this correctly now.  The retail market in Brazil has 1 trillion in sales a year (source: https://www.statista.com/statistics/233086/total-of-retail-net-sales-in-brazil/).  I'd say 50% of sales roughly would be a target for payments processing.  The others are too big or do different things.  Although this is roughly in line with Squares TAM GPV over total US retail sales (see slide 8 here: https://d1g145x70srn7h.cloudfront.net/documents/investor-relations/presentations/2019-02-overview.pdf and google for total US retail sales), this is just a number I pulled out of my hat though keep in mind.  The take is roughly 2% for both (or will be 2% soon enough), and so they would generate 10 billion in revenue.  There margins are about 30%.  So that is about 3 billion which supports a combined market cap of 30 billion at a 10 multiple.  Discount it back 7 or so odd years and you get a combined MC for PAGS and STNE of about 15 billion which is where we are at.  Some things this model is missing, other competitors like Itau and Cielo.  Maybe fatter net margins as STNE is almost at 50% and they may gain more with scale.  But I think to first order combined the companies are approximately fairly valued IMO.

 

How do you account for Cielo as well as the banks that are also into payment processing. It looks like those won’t just roll over and take rate is you g down to the benefit of the customer. Both ITUB, Cielo as well as the other banks are well financed, so they can afford to compete on price to stem market share losses.

 

So this comment was to illustrate that the company was fairly valued and therefore not a buy (and was back of the envelope).  These other factors you mention would make this more likely so.  Bulls likely point to the hub system for STNE and the higher margins for both companies than 30%.  Also a 10 multiple is quite low.  Additionally, 50% ratio of TAM/total Retail sales as SQ has a higher ratio (in an ir marketing presentation though) and a country like Brazil that is emerging probably has a higher ration than the US which big companies probably dominate. 

 

Edit: In addition to vince's hub comments.  But I agree I think I was more conservative in overvaluing it than under and even then it comes out not really a buy. 

[vince]

I was long stne and still long a tracking position, but shifted to PAGS due to valuation.  Maybe not exiting after this drop as this seems like an over-response, but I think the market is close to valuing this correctly now.  The retail market in Brazil has 1 trillion in sales a year (source: https://www.statista.com/statistics/233086/total-of-retail-net-sales-in-brazil/).  I'd say 50% of sales roughly would be a target for payments processing.  The others are too big or do different things.  Although this is roughly in line with Squares TAM GPV over total US retail sales (see slide 8 here: https://d1g145x70srn7h.cloudfront.net/documents/investor-relations/presentations/2019-02-overview.pdf and google for total US retail sales), this is just a number I pulled out of my hat though keep in mind.  The take is roughly 2% for both (or will be 2% soon enough), and so they would generate 10 billion in revenue.  There margins are about 30%.  So that is about 3 billion which supports a combined market cap of 30 billion at a 10 multiple.  Discount it back 7 or so odd years and you get a combined MC for PAGS and STNE of about 15 billion which is where we are at.  Some things this model is missing, other competitors like Itau and Cielo.  Maybe fatter net margins as STNE is almost at 50% and they may gain more with scale.  But I think to first order combined the companies are approximately fairly valued IMO.

 

How do you account for Cielo as well as the banks that are also into payment processing. It looks like those won’t just roll over and take rate is you g down to the benefit of the customer. Both ITUB, Cielo as well as the other banks are well financed, so they can afford to compete on price to stem market share losses.

 

So this comment was to illustrate that the company was fairly valued and therefore not a buy (and was back of the envelope).  These other factors you mention would make this more likely so.  Bulls likely point to the hub system for STNE and the higher margins for both companies than 30%.  Also a 10 multiple is quite low.  Additionally, 50% ratio of TAM/total Retail sales as SQ has a higher ratio (in an ir marketing presentation though) and a country like Brazil that is emerging probably has a higher ration than the US which big companies probably dominate. 

 

Edit: In addition to vince's hub comments.  But I agree I think I was more conservative in overvaluing it than under and even then it comes out not really a buy.

 

Cam I don't necessarily disagree with your analysis but I read every post on Stne subject and I don't recall anyone mentioning the other products and services that are ready to scale or are in trials.  Based on their relationships, their understanding of their end market needs and their execution up until now I think it's a fair assumption that their sandbox could me much larger.  They also mentioned their aspirations to grow outside Brazil.  I'm not arguing that this should change their valuation at this point but if one was trying to estimate an upper range for possible future revenues I think it would be wise to include

[Spekulatius]

I think it is important to note that Brazil banks are not doing too well, ITUB currently sits at a 52week low. Apparent reason seems to be NIM compression , because Brazil’s interest rates have fallen from 14% to ~7%. I guess that is hurting the payment processors as well, since they make their living partly from the float. FWIW, the large incumbent Cielo trades at a PE of 6.5x, which clearly indicates a very dim near term outlook.

[cameronfen]

I was long stne and still long a tracking position, but shifted to PAGS due to valuation.  Maybe not exiting after this drop as this seems like an over-response, but I think the market is close to valuing this correctly now.  The retail market in Brazil has 1 trillion in sales a year (source: https://www.statista.com/statistics/233086/total-of-retail-net-sales-in-brazil/).  I'd say 50% of sales roughly would be a target for payments processing.  The others are too big or do different things.  Although this is roughly in line with Squares TAM GPV over total US retail sales (see slide 8 here: https://d1g145x70srn7h.cloudfront.net/documents/investor-relations/presentations/2019-02-overview.pdf and google for total US retail sales), this is just a number I pulled out of my hat though keep in mind.  The take is roughly 2% for both (or will be 2% soon enough), and so they would generate 10 billion in revenue.  There margins are about 30%.  So that is about 3 billion which supports a combined market cap of 30 billion at a 10 multiple.  Discount it back 7 or so odd years and you get a combined MC for PAGS and STNE of about 15 billion which is where we are at.  Some things this model is missing, other competitors like Itau and Cielo.  Maybe fatter net margins as STNE is almost at 50% and they may gain more with scale.  But I think to first order combined the companies are approximately fairly valued IMO.

 

How do you account for Cielo as well as the banks that are also into payment processing. It looks like those won’t just roll over and take rate is you g down to the benefit of the customer. Both ITUB, Cielo as well as the other banks are well financed, so they can afford to compete on price to stem market share losses.

 

So this comment was to illustrate that the company was fairly valued and therefore not a buy (and was back of the envelope).  These other factors you mention would make this more likely so.  Bulls likely point to the hub system for STNE and the higher margins for both companies than 30%.  Also a 10 multiple is quite low.  Additionally, 50% ratio of TAM/total Retail sales as SQ has a higher ratio (in an ir marketing presentation though) and a country like Brazil that is emerging probably has a higher ration than the US which big companies probably dominate. 

 

Edit: In addition to vince's hub comments.  But I agree I think I was more conservative in overvaluing it than under and even then it comes out not really a buy.

 

Cam I don't necessarily disagree with your analysis but I read every post on Stne subject and I don't recall anyone mentioning the other products and services that are ready to scale or are in trials.  Based on their relationships, their understanding of their end market needs and their execution up until now I think it's a fair assumption that their sandbox could me much larger.  They also mentioned their aspirations to grow outside Brazil.  I'm not arguing that this should change their valuation at this point but if one was trying to estimate an upper range for possible future revenues I think it would be wise to include

 

Sure you may be right about new products but I am unaware (and I don't think it was mentioned in the board).  Excuse my ignorance but what products are ready to scale and on trials? 

 

About extrapolations of TAM, sure I may not have been aggressive enough in their market cap forecast but at the same time, I don't think it is wise to give to much credit for things management promises to do (including how "innovative" their hub model is).  It's easy for management to promise new products to make TAM look bigger, but much more difficult to execute.  Maybe their hub model is really innovative, but it's more likely someone else would have successfully used this and became successful if it's that much better than the competition.  I think ignoring Cielo and Itau, is still probably a more glaring omission than these trials.  Maybe moving to other countries is a "blue sky" possibility though.  Again while I was trying to be aggressive with the market cap projection, the end goal was to decide whether to invest or not, so I'm wasn't planning on throwing every possible thing going right into the valuation. 

 

Again my philosophy, mostly because I'm lazy and busy, is to be do back of envelope calcs to just varify thoughts.  I'm not going to go through and get a percise valuation from a DCF with every possible outcome considered.  Plenty more to add to this valuation if you want to. 

[vince]

I was long stne and still long a tracking position, but shifted to PAGS due to valuation.  Maybe not exiting after this drop as this seems like an over-response, but I think the market is close to valuing this correctly now.  The retail market in Brazil has 1 trillion in sales a year (source: https://www.statista.com/statistics/233086/total-of-retail-net-sales-in-brazil/).  I'd say 50% of sales roughly would be a target for payments processing.  The others are too big or do different things.  Although this is roughly in line with Squares TAM GPV over total US retail sales (see slide 8 here: https://d1g145x70srn7h.cloudfront.net/documents/investor-relations/presentations/2019-02-overview.pdf and google for total US retail sales), this is just a number I pulled out of my hat though keep in mind.  The take is roughly 2% for both (or will be 2% soon enough), and so they would generate 10 billion in revenue.  There margins are about 30%.  So that is about 3 billion which supports a combined market cap of 30 billion at a 10 multiple.  Discount it back 7 or so odd years and you get a combined MC for PAGS and STNE of about 15 billion which is where we are at.  Some things this model is missing, other competitors like Itau and Cielo.  Maybe fatter net margins as STNE is almost at 50% and they may gain more with scale.  But I think to first order combined the companies are approximately fairly valued IMO.

 

How do you account for Cielo as well as the banks that are also into payment processing. It looks like those won’t just roll over and take rate is you g down to the benefit of the customer. Both ITUB, Cielo as well as the other banks are well financed, so they can afford to compete on price to stem market share losses.

 

So this comment was to illustrate that the company was fairly valued and therefore not a buy (and was back of the envelope).  These other factors you mention would make this more likely so.  Bulls likely point to the hub system for STNE and the higher margins for both companies than 30%.  Also a 10 multiple is quite low.  Additionally, 50% ratio of TAM/total Retail sales as SQ has a higher ratio (in an ir marketing presentation though) and a country like Brazil that is emerging probably has a higher ration than the US which big companies probably dominate. 

 

Edit: In addition to vince's hub comments.  But I agree I think I was more conservative in overvaluing it than under and even then it comes out not really a buy.

 

Cam I don't necessarily disagree with your analysis but I read every post on Stne subject and I don't recall anyone mentioning the other products and services that are ready to scale or are in trials.  Based on their relationships, their understanding of their end market needs and their execution up until now I think it's a fair assumption that their sandbox could me much larger.  They also mentioned their aspirations to grow outside Brazil.  I'm not arguing that this should change their valuation at this point but if one was trying to estimate an upper range for possible future revenues I think it would be wise to include

 

Sure you may be right about new products but I am unaware (and I don't think it was mentioned in the board).  Excuse my ignorance but what products are ready to scale and on trials? 

 

About extrapolations of TAM, sure I may not have been aggressive enough in their market cap forecast but at the same time, I don't think it is wise to give to much credit for things management promises to do (including how "innovative" their hub model is).  It's easy for management to promise new products to make TAM look bigger, but much more difficult to execute.  Maybe their hub model is really innovative, but it's more likely someone else would have successfully used this and became successful if it's that much better than the competition.  I think ignoring Cielo and Itau, is still probably a more glaring omission than these trials.  Maybe moving to other countries is a "blue sky" possibility though.  Again while I was trying to be aggressive with the market cap projection, the end goal was to decide whether to invest or not, so I'm wasn't planning on throwing every possible thing going right into the valuation. 

 

Again my philosophy, mostly because I'm lazy and busy, is to be do back of envelope calcs to just varify thoughts.  I'm not going to go through and get a percise valuation from a DCF with every possible outcome considered.  Plenty more to add to this valuation if you want to.

 

Cam, I'm not trying to hype up this business and like I said, I don't necessarily disagree with your valuation.  But I do think that if you read all of the available material you would have a different view on their various opportunities.  And yes I am surprised also that nobody talks about their push into other products (enterprise software, credit and banking) but they are real, coming to market soon and are talked about very much by mgmt in response to analyst questions and are dealt with in detail in their quarterly presentations.  Normally I wouldn't give much, if any, weight to these but with their track record of execution and straightforward communications I think it's a big mistake to ignore.  I also think you may be underestimating their hub strategy of being close to the customer and focusing on prompt and consistent support which by the way would bolster their multi-product strategy. I mean how do you account for the remarkable success of their business in 4 short years?  In effect, they are being paid with business to educate these merchants (one incumbent remarked that it's a waste to educate the merchants cause they couldn't read anyway) on how hard they have been screwed.  And they see a big opportunity with software solutions (32,000 of their clients now use at least one of their software products up from 14,000 when they acquired a software firm with 18,000 clients) for the same reason.  They think the merchants are eager for better and more efficient business building and the incumbents have no answer but to cut prices.  Every business worries to a certain extent of some irrational competitor but how low and for how long can they go?  Just the mere fact that incumbents have aggressively adjusted their pricing shows that they know they are being disrupted.  And I think some people believe that Stne is disrupting with pricing but that is not the case (even sounds like Stne is the high price right now)  They are simply giving the clients a superior value proposition for similar pricing.  An earlier poster (Red.... was his name) suggested to read the available material on the business and generally read about the industry and competition and the thesis would come to us as it did him....and I agree with him.  The history of the industry, the comfortable incumbents, the secular tailwind, the changing regulations, the unserved, unhappy clients, and the hungry, fresh eyed disrupters combine to produce the results that Stne is.  Munger has repeated multiple times that results such as these are caused by a lollapalooza effect and thats just what I see.  However, I'm going to hedge my post by saying that the price is expensive looking.....it's much easier to look skilled as an investor long term buying a defensible business at 10 times cash earnings thats virtually guaranteed to grow along with nominal GDP without much additional incremental capital needed to achieve that growth than it is to buy a business at 40-50 times earnings no matter what the growth rate looks like.  So in the end I kind of agree with you except to say that if you were going to try and play the high growth-high multiple game this looks like a good one to me.

[cameronfen]

Regarding the above^^, so you may be right, but again I think buying a company that is trading at a quarter of square's valuation (square being the developed country counterpart) puts some sort of ceiling for STNE.  I don't think management has proven to be genius as PAGS suggests it is the business model that is generating a lot of the growth (although STNE is growing faster).  You may be right that there is lots of growth around the corner with there new products, and management is hyping it based on at least Q4 power-point updates (looking at them again), but I'm not sure if they can execute.  As perhaps you are aware I am interested in other high flyers, but typically unless there is some blueprint for success for a firm (say other companies have already charted a viable path). 

 

Again back of the envelope quick math for the auxiliary businesses (happy to be corrected if I'm wrong about this).  Banking and Credit is 85 billion real opportunity.  NIM for banks (after adjusting for Brazilian inflation) is 3% (derived by looking at itau NIM and removing the increase in inflation Brazil has as the value of company will be in usd).  This comes out to 2.5b real in profit or 600m usd.  This adds maybe 6 billion usd in market cap if it works. 

 

Software is probably more lucrative.  I'm going to use Salesforce's net profit margin (after adjusting for marketing spend by reducing it to Oracles marketing expense/revenue).  If we assume 20% or revenue is spent on marketing (what Oracle spends) then CRMs profit is about 3.2b.  Take over 13.3b in revenue and you have a net margin of about 25%.  Which comes out to another 2.5b real.  This could be significantly higher as STNE and PAGS are surprisingly profitable compared to SQ.  Why?  I don't know.  Could that carry over to other software markets (maybe? idk?).  Again both these verticals look interesting, but its not the 5x market cap multiplier management wants you to believe when they say the TAM is 5x bigger. 

 

Both of these add about 12-18b in market cap if they both work.  They should be discounted by time and by probability of success (which I'm not sure how to model).  This is just my first shot and building a model.  I have not looked at the other products in any depth compared to others.  Let me know if there are mistakes.  This is interesting though and if there is proof of strong execution I may take another opportunity to buy in. 

 

I don't know if you are aware of my other high multiple stocks I like, but I tend to view the other companies as comps not so much by applying comp multiples, but as tools to figure out how the business will progress based on more mature companies.  I tend to like companies where there already is a "blueprint" for success based on other companies in other countries or vertices.  Here though, I don't know what blueprint to evaluate this cross-selling probability of success against, so it's difficult to convince justify risking money. 

[vince]

Regarding the above^^, so you may be right, but again I think buying a company that is trading at a quarter of square's valuation (square being the developed country counterpart) puts some sort of ceiling for STNE.  I don't think management has proven to be genius as PAGS suggests it is the business model that is generating a lot of the growth (although STNE is growing faster).  You may be right that there is lots of growth around the corner with there new products, and management is hyping it based on at least Q4 power-point updates (looking at them again), but I'm not sure if they can execute.  As perhaps you are aware I am interested in other high flyers, but typically unless there is some blueprint for success for a firm (say other companies have already charted a viable path). 

 

Again back of the envelope quick math for the auxiliary businesses (happy to be corrected if I'm wrong about this).  Banking and Credit is 85 billion real opportunity.  NIM for banks (after adjusting for Brazilian inflation) is 3% (derived by looking at itau NIM and removing the increase in inflation Brazil has as the value of company will be in usd).  This comes out to 2.5b real in profit or 600m usd.  This adds maybe 6 billion usd in market cap if it works. 

 

Software is probably more lucrative.  I'm going to use Salesforce's net profit margin (after adjusting for marketing spend by reducing it to Oracles marketing expense/revenue).  If we assume 20% or revenue is spent on marketing (what Oracle spends) then CRMs profit is about 3.2b.  Take over 13.3b in revenue and you have a net margin of about 25%.  Which comes out to another 2.5b real.  This could be significantly higher as STNE and PAGS are surprisingly profitable compared to SQ.  Why?  I don't know.  Could that carry over to other software markets (maybe? idk?).  Again both these verticals look interesting, but its not the 5x market cap multiplier management wants you to believe when they say the TAM is 5x bigger. 

 

Both of these add about 12-18b in market cap if they both work.  They should be discounted by time and by probability of success (which I'm not sure how to model).  This is just my first shot and building a model.  I have not looked at the other products in any depth compared to others.  Let me know if there are mistakes.  This is interesting though and if there is proof of strong execution I may take another opportunity to buy in. 

 

I don't know if you are aware of my other high multiple stocks I like, but I tend to view the other companies as comps not so much by applying comp multiples, but as tools to figure out how the business will progress based on more mature companies.  I tend to like companies where there already is a "blueprint" for success based on other companies in other countries or vertices.  Here though, I don't know what blueprint to evaluate this cross-selling probability of success against, so it's difficult to convince justify risking money.

 

Looks like you have used reasonable assumptions for the other product opportunities and I absolutely agree they should be discounted for time and probability.  I am probably the wrong person to use as a filter when looking at high growth-high multiple businesses, it's just not my game.  But this stock could potentially be bought rationally from a value investors perspective (before anyone laughs, hear me out) if looked at in a different way.  Instead of thinking about the maximum value in terms of market cap based on size of addressable market (not that there is anything wrong with that process) I'm trying to determine what growth rate and how long it will take for this business to earn annually an amount that co-responds to a 10 multiple on net economic earnings (or basically earn 1/10th of market cap on date of purchase), which equals roughly 700 million USD.  Now if we assume that the incumbent responses are reasonably successful (meaning the growth rate drops to 10-15 percent) then for sure the stock is going to get killed and the multiple will fall to a point where the market gets comfortable with a price that reflects a good return with that growth rate.  And an investor would still do ok over a period 8-10 years with a 15% growth rate assuming they earn say 200 million this year (i know thats a little bit of a stretch if competitive reactions are successful but lets assume it takes a while for reactions to have an effect and assume there are lots of merchants already in the pipeline).  At the other end of spectrum, lets assume that reactions have little effect and this sucker can grow at say an average of 50% for a few years and then settle down to that 10-15% range, this would be a fantastic investment and at this point it doesnt look too unlikely imo and is not that aggressive based on all available information now.  Obviously there are many more potential outcomes and you need lots of good performance from this business to justify today's price but thats the way I think about it and I might be dead wrong in thinking about it like that.  And like I said, I would much rather buy a proven model with competitive advantage in a stable industry at a 10 multiple (surprisingly I have found quite a few of these in last few years despite the low interest rates and high multiple of the S&P) but maybe I should throw in one of these high multiple stocks occasionally.  Thanks for all your input Cam, much appreciated.

[Spekulatius]

Unless I am mistaken, STNE and PAGS process about the same payment volume (~25B real), yet STNE’s revenue is less than half PAGS (~530M vs 1267M for PAGS), somit seems to me that STNE is the low price/low cost provider here by a significant margin. Presumably, PAGS is cheaper than the incumbents.

 

The low transaction cost is one reason why STNE has a much higher proportion of interest income. Given that, it looks like the incumbents will have a hard time fighting back.

[Jerry Capital]

Surprised with no discussion of $MELI which is much better positioned than $PAGS or $STNE to benefit from digital payments. $STNE and $PAGS sell a commodity. Legacy merchant acquirers will keep a lid on pricing, just like we saw with Rede.

 

With a clear blueprint for success (Alipay PayPal), a first and best customer MercadoLibre Marketplace, Mercado Pago is the much better competitively positioned.

[walkie518]

my dollar to your doughnuts, Berkshire invested due to its relationship w/3G as a co-investor

 

Arpex Capital was founded by Andre Street and Lehman from 3G... Roberto Motta (3G) is on the board of StoneCo as is Carl Pascarella (TPG)

 

I can't weigh one way or another if this is a good investment for the public, but it's likely a score for 3G, Berkshire, and TPG

[cameronfen]

Unless I am mistaken, STNE and PAGS process about the same payment volume (~25B real), yet STNE’s revenue is less than half PAGS (~530M vs 1267M for PAGS), somit seems to me that STNE is the low price/low cost provider here by a significant margin. Presumably, PAGS is cheaper than the incumbents.

 

The low transaction cost is one reason why STNE has a much higher proportion of interest income. Given that, it looks like the incumbents will have a hard time fighting back.

 

So STNE and PAGS have take rates that are similar to Cielo.  Cielo is at 2% and STNE is at 1.88% take rate and PAGS is similar to STNE but didn't look up.  I think Vince is right that although there main attraction is services rather than cost.  Think square with the ui easy integration with other payments, data logging and analytics (I dont know if SQ does these things).  IMO I think likely the main advantage these guys have over Cielo is that its built on software.  Any update or integration just requires updating some code.  If you think of the old fashion cash registers and credit card terminals, it's basically a hardware first philosophy.  In order to custom integrate it or even update you have to by a new machine.  Obviously people are changing including Cielo. 

 

As far as @jerrycap's comment, I will look more closely at MELI.  I looked at them and was a little unconfortable by the valuation a while back.  I'll look again.  It sounds like you are aware but MELI's payment platform is more akin to alipay as opposed to square or STNE.  Margins and take rate are much lower for this kind of payment but network effects are much stronger as it's basically a credit card substitute.  If Alipay is worth 100b then Meli payments at scale could be worth maybe 20-30b based on a population ratio, but it's not even close to as dominant.  It could be worth significantly more though if they are able to adopt take rates similar to PayPal (but again that's almost a hybrid model between alipay and sq). 

[gfp]

"in 54 years, I don’t think Berkshire has ever bought a new issue.”

 

https://www.cnbc.com/2019/05/06/warren-buffett-im-not-buying-the-uber-ipo-but-ive-never-bought-any-ipo-ever.html

 

Of course he probably intended to say that Warren had never bought a new issue.  But by saying "Berkshire" it makes it look like he's not paying attention

 

 

[Jurgis]

"in 54 years, I don’t think Berkshire has ever bought a new issue.”

 

https://www.cnbc.com/2019/05/06/warren-buffett-im-not-buying-the-uber-ipo-but-ive-never-bought-any-ipo-ever.html

 

Of course he probably intended to say that Warren had never bought a new issue.  But by saying "Berkshire" it makes it look like he's not paying attention

 

People who expect BRK to be the same after Warren dies and T&T take over are going to be disappointed IMO.

[RadMan24]

Have you read the prospectus? You'd get more info there than anywhere else.

 

All you need to know its the first time I've seen " no bull shit" in a filing.

 

In all seriousness, I got interested for same reason. It took a while to get my head around it, but do the following:

• Read the prospectus and all recent filings and recent earnings call.
   
  
• Read about the big Brazil payment processors, just in general, the payment processor industry in the mid to small business market (i.e. neglected market, several years of recession, stoneco offers improved working capital management, lowers cost and friction with customers, boosts sales, keeps customers happy with excellent service, repeat).
   
  
  • Read about Square.
     
    
  • And watch for inflection point in earnings. StoneCo could earn $1b reals in the new fiscal year.

   

 

Then sit back and think. It'll come to you.

 

Stone Co hit its ramp up in earnings, never thought it'd be back to low $20s, but here we are. Brazil is in lock down basically to ward of infection. The balance sheet is strong, still gaining share, expanding into adjacent markets, there's a lot to like here. Also going after micro merchants.

[scorpioncapital]

I do not feel Brazil is anywhere near the stability level of China , or even Russia..and I do not think their legal system is as developed as a Western nation. As such I have no idea what Todd was thinking. It may pan out as an emerging markets investment but the risks are high. I mean they have made blunders even in American investment. And now with the crash it seems American stocks can be had for returns exceeding even emerging markets in some cases. So what's the benefit?

[RadMan24]

I do not feel Brazil is anywhere near the stability level of China , or even Russia..and I do not think their legal system is as developed as a Western nation. As such I have no idea what Todd was thinking. It may pan out as an emerging markets investment but the risks are high. I mean they have made blunders even in American investment. And now with the crash it seems American stocks can be had for returns exceeding even emerging markets in some cases. So what's the benefit?

 

A company that is highly profitable in said "country" ought to tell you something.

[scorpioncapital]

Do you know what the expected growth rate is? I suppose one could imagine the growth rate as being equivalent to the initial yield on a high dividend preferred or bond (now during the crash) but with the extra perk that it will keep growing and not be flat like such a bond like security.

[hasilp89]

two questions as I’m trying to fully understand business and potential downsides, if anyone has insight it would be much appreciated.

Both are on the Financial segment did r$1.3b in 2019 (60% growth) with $r300m of costs. Seems like a large driver of growth and profits.

1. How does the funding work on this. I see that they either sell receivables, use a funding facility or use cash. My concern is The first two don’t seem very simple (maybe I’m dumb)but experience tells me that there is a greater room for error when things are complex. Could there be mismatched liabilities with the funding facility and the prepayments? Cielo had a ppt that Brazil transactions were down 50%, can such a sharp drop have an impact on funding?

 

2. Is prepayment a long term business? Maybe I’m wrong but In my business we just wait the 3-4 days to get the money, I understand smb’s need the cash but their working capital cycles can’t benefit that greatly from a 2-3 advance? Also as economy matures won’t they have access to better sources of capital / not need short term funding?

[spartansaver]

two questions as I’m trying to fully understand business and potential downsides, if anyone has insight it would be much appreciated.

Both are on the Financial segment did r$1.3b in 2019 (60% growth) with $r300m of costs. Seems like a large driver of growth and profits.

1. How does the funding work on this. I see that they either sell receivables, use a funding facility or use cash. My concern is The first two don’t seem very simple (maybe I’m dumb)but experience tells me that there is a greater room for error when things are complex. Could there be mismatched liabilities with the funding facility and the prepayments? Cielo had a ppt that Brazil transactions were down 50%, can such a sharp drop have an impact on funding?

 

2. Is prepayment a long term business? Maybe I’m wrong but In my business we just wait the 3-4 days to get the money, I understand smb’s need the cash but their working capital cycles can’t benefit that greatly from a 2-3 advance? Also as economy matures won’t they have access to better sources of capital / not need short term funding?

 

STNE merchant accepts payment for R$10. STNE pays merchant R$9 today allowing the merchant to factor its receivable at a set interest rate. STNE gets paid ~30 days later by the bank the full R$10. 

[hasilp89]

Thanks, I understand the basics of it, was just curious how the funding mechanism works and if there was credit or interest rate risk. I saw they have some more info in the registration statement which states customers can decide, apply and select for themselves the prepayments they get vs. the old way which involves calling bank etc. my concern is that there is hidden credit risk there, especially in a time like this when businesses are shuttered and consumers default. Eg. filing specifically mentions the fact that people in Brazil pay in installments over 12 months at zero interest. If STNE has fronted a merchant $100 that the customer was going to pay merchantover the next 12 months, does STNE now face the risk that merchant can’t collect the full $100 and pay STNE back?

[dpetrescu]

Anyone else own STNE? It’s up almost 30% after hours. Any thought on the earnings update?

 

I have to admit I know nothing about this, just invested right after Berkshire. Wish I did know more about fin tech. It’s really out of my field. I think this industry is one impact post Covid - a disruption that was already underway that Covid is or will be accelerating.

[RadMan24]

https://www.sec.gov/Archives/edgar/data/1745431/000095010320010122/dp128729_ex9901.htm

 

 

Has Nirvana arrived? Major KT is major growth in e-commerce and market share growth. Recovery in May following ease of restrictions. The moral hazard is Brazil taking on 1,000 deaths a day so the economy remains open.

 

On one hand, this is good for the shareholders and economy. On the other hand, how long does a large country put up with 1,000 deaths a day? Does it matter if Stone's business model is that good?