Stock Analysis & Ideas

StoneCo Stock Deserves Time and Patience, Says Analyst

The main indexes’ handsome 2021 returns mask a brutal reality; dig beneath the mega-caps’ steady gains, and what you find is a heap of broken former high-flying growth stocks.

You can add StoneCo (STNE) to that list. Shares of the Brazilian fintech have been decimated to the tune of 80% over the past year.

The share losses have gone hand in hand with real world issues, driven by a country hit by high inflation yet stagnant economic growth. Surveying this landscape, Morgan Stanley’s Jorge Kuri believes it’s time to reassess Stone Co’s prospects.

The analyst has lowered his 2021 EPS estimate from US$0.74 to US$(0.70). Likewise, there’s a reduction to the 2022 EPS estimate, which drops from US$1.07 to US$0.26. Based on non-GAAP figures, the new 2022 and 2023 net income forecasts now stand at R$779 million and R$1,650 million, respectively. The respective 2022 and 2023 current sell-side consensus estimates are R$745 million and R$1,420 million.

“The significant adjustments to our estimates are driven by higher financial expenses on the back of rising Selic rates, lower revenues on the back of tougher competition and slower activity, and higher operating expenses,” Kuri expounded. “Evidently, we are late to incorporate the much tougher backdrop and company fundamentals to our estimates. Consensus has moved and the shares have done so too.”

Where catalysts are concerned, Kuri thinks “more clarity on when and at what level Selic rates will peak this year and the velocity of the easing cycle thereafter,” will be needed for sentiment to truly change. Additional visibility will also be required on how the company plans to restructure the lending business and on potential synergies for Linx, the software provider StoneCo acquired in 2020.

If you’re after quick gains, Kuri implies you should probably look elsewhere, but those with a stoic mentality could reap the rewards eventually. “An investment in STNE today requires patience as the market may want to see concrete evidence of improvement before stepping in again,” the analyst summed up.

All the above results in a significant slash to the stock price target, which drops from $67 to $39. Nevertheless, following the massive share price selloff, there’s potential upside of 138% from current levels. Kuri keeps his Overweight (i.e., Buy) rating stays as is, as he believes the valuation on 2023-24 estimates “looks appealing.” (To watchKuri’s track record, click here)

The Street’s take offers an interesting paradox; the stock currently boasts a Hold consensus rating, based in 4 Holds and 2 Buys and Sells, each. However, there’s some nice gains projected here; at $27.33, the average target suggests shares will rise by 67% in the year ahead. (See STNE stock analysis on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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