IMO they have a SUCCESSFUL turnaround in their rear-view mirror and are now firing on all cylinders in a greenfield environment. I will address the turnaround towards the bottom of this post. In the meantime I think they are growing RIGHT NOW, so it’s more important to focus on that vs. the turnaround.
The bulk of its revenue is from their POS solutions; to over-simplify, they are the Brazilian equivalent of Square. Their client base is SMB plus “micro” businesses that consist of only one person.
They have other active revenue streams they are actively growing. They have ambitions to expand adjacent revenue streams (…which they are already doing), expand to larger clients, and potentially expand to (edit: other) countries.
However for the near and mid-term, their competitive moat consists of the POS solutions they have that makes it easier to operate a business in Brazil. I won’t pretend to be well-versed in what that entails; I am still learning. My best understanding is that there are many challenges unique to POS systems in Brazil. For instance, Merchants have to be able to accept a lot of different forms of payment, some of which are unique to Brazil (…involving “Pix” and “Boleto”).
I think their profitability and growth numbers provide evidence that they do have a lucrative moat in their core POS business, and that they have a greenfield opportunity to increase revenues.
Revenue in Brazilian Reals
Sources of revenue:
POS terminals (hardware), Checkout, Tap-on-Phone, Whatsapp Pay, Credit Card handling, Cash Handling, Pix, Boleto, Close Cash Register, Settle Payment, Print Receipt.
NOTE: Their handheld hardware is connected to ERP and Financial Operations/Banking software (see below).
Create invoices, Manage an online store, purchase/manage inventory, pay employees, expense reports, “Hyper Local” Delivery Services, track Sales and Cash Flow. Functionality for Employees to request, and Owners to approve, scheduled payments.
Financial operations (banking)
Check balance, invest funds, obtain loans.
Long term vision for their software
- Save their clients time by having POS, ERP and Banking integrated and usable from a “single pane of glass”
- Ensure their clients have all payment options available so they never have to miss a sale
- Keep clients’ money in the $STNE ecosystem. NOTE: it’s my best understanding that $STNE has applied for, and expects to soon receive a Banking license, which should enable them to make $$ from their clients’ deposits
- Expand from being the Square of Brazil to also being the Shopify of Brazil
Long Term Vision for Durable Growth
- Keep expanding on current greenfield in POS for “Micro-and-SMB” (MSMB)
- Keep expanding sales of ERP solutions (…to become the Shopify of Brazil)
- Keep growing clients who sign up for Banking/Financial Services
- Keep growing their (currently-small-but-growing) Lending services
- Obtain and leverage a Banking License
Long Term Vision for Operating Leverage
- Reduce expenses and friction from new initiatives by rationalizing their existing three software stacks into a single platform ( this is in-progress )
- Detach themselves from Customers who are not sufficiently profitable (this is in-progress)
Main Plot Points in The Turnaround Story
- Things were going well; POS was their focus
- They decided to AGGRESSIVELY move into Lending
- They used faulty credit-worthiness data provided by the Brazilian Government (…the "national registry database), and had to eat a lot of bad loans.
- Pandemic happened and interest rates shot up, Brazilian Real vs. Dollar exchange rate got worse
- Stoneco had to pay a lot more interest on their debt, but did not raise interest on their clients’ debt. I’m sure their clients appreciated it, but Stoneco lost HUNDREDS OF MILLIONS on their credit portfolio and as of the end of 2022 still had $80M in bad debt on their books.
- In the third quarter of 2021 they registered a $230M loss from a bad investment in a bank called Banco International.
- They were able to stay in business, and even increase their customer count, based mostly on the strength of their POS business
- They got some new blood onto their Board and (…as of May 20230 a new CEO
- They got rid of the last of their bad debt and cleaned up their books
- They have acknowledged their mistakes: " …we tried to do a lot last year, and we simply did not execute it, as well as we would have liked.
We ramped our credit offering quickly, but we did not manage this expansion well. "
- Going forward, they have a much more measured approach to Durable Growth, including a very specific roadmap of what they are focusing on, in what order.
Some thoughts on where things stand now
- Their stock has been completely pummeled
- IMO they are de-risked not just in stock price, but they have made appropriate adjustments that make them much less vulnerable to the stuff that went wrong previously.
- Their numbers are super compelling. Where else can you get forward revenue growth of 40% (…according to their page on SeekingAlpha), a Gross Margin of 74%, producing buckets of cash from operations at a P/E of 18
I got in with a 6% position last week.
Sorry for the lack of detail; I’ve run out of time for this evening…I’ll try to add some additional detail this coming week.