StoneCo LTD (NASDAQ:STNE): Brazil’s Hottest Payments Stock

Consider how complicated life would be if the majority of business transactions were still handled with physical cash. While it might be hard to imagine, this is the reality for many of the developing countries in the world. American Express believes that roughly 85% of transactions in Latin America are still handled with cash. We all know how efficient it is to pay for things digitally, which is why investing in a company that is helping to make that possible in Latin America might be a smart idea.

StoneCo LTD (NASDAQ:STNE) is a Brazilian financial technology solutions company that is disrupting the payments space in one of the largest countries in Latin America. The stock has been on the move lately and could offer investors nice returns over the long run. Here are a few reasons why StoneCo stock is worth a look.

Disruptive Business

As we mentioned earlier, Latin Americans still use cash to handle most of their daily transactions. That will likely be changing soon thanks to the widespread adoption of online retail. StoneCo is disrupting the payments industry in Brazil and primarily focuses on helping small and midsized businesses implement digital payments via its electronic commerce solutions. The company offers payment acceptance, e-commerce management tools, and credit services to merchants that are interested in taking their businesses into the digital age.

The concept of e-commerce really hasn’t caught on yet in Latin America and Brazil, but many believe that it will inevitably explode as it has in other countries. It’s worth noting that as of March 31, 2020, Warren Buffett’s Berkshire Hathway Inc. (NYSE:BRK.B) held 14.2 million shares of StoneCo. The fact that the legendary investor is interested in this company signifies that it definitely has potential. As online retail increases in prominence in the region, StoneCo looks like it will be ready to take advantage. The company actually handled 51% of Brazil’s e-commerce transactions in Q1 2020 and it wouldn’t be surprising to see StoneCo eventually become the leading digital payments processor in Brazil.

Potential Merger

StoneCo made headlines this week after announcing that it has signed a definitive agreement to merge its business with Linx (NYSE:LINX), the leading provider of retail management software systems in Brazil. Although the deal has not officially gone through yet, it could mark the beginning of a new era for StoneCo. It’s easy to understand why the share price hit all-time highs after the news broke as this could be the perfect strategic move for the company.

The merger will help StoneCo on its mission to provide financial technology to more Brazilian merchants so that they can handle their business in a more efficient way. The rationale behind the deal is that with Linx’s technology, StoneCo will be able to reach more customers and gain the opportunity to penetrate the SMB software market. StoneCo will also benefit by providing its payments technology and financial services to Linx’s 70,000 existing clients.

Q2 Positive Amidst COVID-19 Impacts

Even though Brazil’s economy has been negatively impacted by the pandemic, StoneCo’s business began to rebound and return to pre-COVID levels in Q2. When StoneCo reported its Q2 earnings earlier this week, it missed on EPS estimates but was able to grow revenue by 13.8% year-over-year. This is absolutely a positive sign for the company since it operates in one of the countries that are getting hit the hardest by the pandemic. StoneCo also reported a strong Adjusted Pre-Tax Margin in Q2 of 29.9%.

When it comes to assessing a digital payments business, it’s always a good idea to consider the total payment volume to determine whether or not people are actually using its services. This figure was another positive for StoneCo in an economically uncertain Q2, as its Overall Total Payment Volume in Q2 grew 27.9% year-over-year to R$38.1 billion. Online Total Payment Volume for its Digital Commerce business grew 80% year-over-year in Q2 and saw 94% growth in July 2020, which means it is rebounding from the impacts of the pandemic. Ecommerce revenues for the company are also showing positive signs and are up over roughly 100% since the beginning of the year. These are encouraging numbers for a company that was undoubtedly experiencing negative impacts from the pandemic in Q2.

Digital Payments Potential

There are some very important changes that are occurring in Brazil which could provide the perfect opportunity for a company like StoneCo to become its leader in digital payments. It’s only a matter of time before e-commerce catches on in Brazil, and this company will be well-positioned to take advantage. Although there are risks related to Brazil’s economy and other Latin American fintech competitors like MercadoLibre(NASDAQ:MELI), this emerging market stock is absolutely worth a look during pullbacks.