Thoughts on StoneCo (STNE)

A few months ago, I became intrigued with StoneCo – on the notion that it might be the “Square of Brazil” – and bought a small position while I studied it. I came across several questions that I just didn’t know the answer to.

My primary concern is with its business model, which requires Stone Hubs, local sales and customer support offices, to be operated in all the areas where merchants will be using StoneCo’s services. From the company’s annual 20-F filing:

We distribute our solutions primarily through proprietary Stone Hubs. These hubs are located in small and medium-sized cities, or suburban areas of larger cities, and are designed to provide hyper-local sales and services and high-quality, on-demand support to SMB merchants within the hub’s designated area of operations. Our hubs may share an office depending on the size of the area served. We believe this approach enables us to provide a superior customer experience to our clients and is a key part of our go-to-market strategy. We had 245 operational Stone Hubs in January 2019, and we are currently growing our hubs’ footprint to maximize our presence in Brazil and provide sales coverage to the country’s approximately 5,500 cities with a total population of 208.5 million.

This just raised concerns about how well StoneCo could scale. One of Square’s more attractive qualities is that one can easily purchase the hardware online or at a local Best Buy, and on-board within minutes. It’s easy and self-intuitive. There is no need for Square to have offices in different regions for sales or customer support.

Now, the Brazilian market is vastly different than the US. Landline and mobile connectivity services are much less robust. Card and digital payments are not as widely accepted. The population as a whole is probably less tech-savvy, simply because general technology is not as widespread yet. So, as far as I know, this type of hyper-local sales and customer support, might just be the best way to tackle the Brazilian market. But 1) I am not sure of this; and, 2) it just seems that StoneCo’s operation costs will always be more because of this local presence they must maintain.

Another concern I had was how much the stock tanked on news that one of its competitors was drastically lowering fees. I discovered that cards are prohibitively expensive to use and accept in Brazil, one of the things that has helped keep cash in such a prominent place in its economy. Would this affect StoneCo’s business? I realized I had no idea. Any odds I attached to such an event would be totally arbitrary.

For these reasons I sold out of my StoneCo position at a loss. I believe my position in MercadoLibre offers me plenty exposure to the South American economy with a more diversified and promising business model.

These are just my thoughts. StoneCo’s numbers continue to look very good, and the company might do extremely well from here, but it was too hard of a nut to crack for me.

Matt
Long MELI, SQ
Phoenix 1 Contributor
BlackLine (BL), MasterCard (MA), PayPal (PYPL), and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/TMFCochrane/info.aspx

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Hi Matt,

Thank you for your considered post.

I believe Stone Co. is reducing the friction in using electronic payments, which is why there is massive growth. Even with the announced offering by a competitor, the competitor still charge around 3% in merchant fees.

As a comparison between Stone Co and Sqaure, look at this:

Stone Co’s revenue is 2% of TPV,
Squares revenue is 2.2% of TPV.

Despite Stone Co. being more labour intensive, it’s costs are lower than Squares per unit of revenue. This is simply because wages are far lower in Brazil, with the median salary less than 20% of the US counterpart.

Stone Co. model is very different to Squares, because input costs are far different in Brazil, as is the infrastructure that serves Brazilian businesses.

I understand your concerns, and I will be watching the 2 nd quarterly results closely. The management team have advised they are monitoring customer churn, and renegotiation requests closely to identify a need to change their pricing model. There should be signs of this in the next quarterly results.

I am long Stone Co.

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Hey Seanr53,

As a comparison between Stone Co and Sqaure, look at this:

Stone Co’s revenue is 2% of TPV,
Squares revenue is 2.2% of TPV.

Despite Stone Co. being more labour intensive, it’s costs are lower than Squares per unit of revenue. This is simply because wages are far lower in Brazil, with the median salary less than 20% of the US counterpart.

Not sure if I 100% agree with your conclusion. Look at all the supplemental services Square offers through its subscription and services-based revenue segment. Square’s adj revenue includes Caviar (food delivery), payroll apps, instant deposit fees, Cash App, its new debit card, cryptocurrency trading fees, business loans, etc. StoneCo doesn’t offer any of that (that I know of). That’s why Square’s revenue makes up a higher percentage of TPV I would imagine.

Stone Co. model is very different to Squares, because input costs are far different in Brazil, as is the infrastructure that serves Brazilian businesses.

I definitely agree with this and this is part of the information I am just too ignorant of to make a reasonable conclusion. There are just too many unknowns for me. Again, StoneCo could do very well from here. Indeed, its local sales and customer support – its Stone Hubs – could be the very thing that propels it to success. But it was too much of a gamble on something I didn’t understand. I truly wish you the best, just not for me.

Matt
Long SQ
Phoenix 1 Contributor
BlackLine (BL), MasterCard (MA), PayPal (PYPL), and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/TMFCochrane/info.aspx

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