StoneCo Stock May be Basing Like a Rock

Brazilian point-of-sale (POS) financial technology provider StoneCo NASDAQ: STNE stock has fallen (-54%) year-to-date despite triple digit top-line growth. The popular aggregator of electronic and digital payments and e-commerce platform in Brazil not only beat its fiscal Q1 2022 estimates but raised it top-line outlook for fiscal Q2 2022. The global macroeconomic slowdown fears have been a damper on stock performance, but the underlying business is strong and growing. Larger fears of an economic slowdown in Brazil, which saw a 5% GDP growth in 2021 has added to this disconnect between strong fundamentals and weak technicals. Prior to the pandemic, Brazil was mostly a cash-based economy. The pandemic accelerated the migration to e-commerce, but the volatility of the economy has caused shares to collapse from a pandemic high of $95.12 in February 2021 to plunge to a low of $6.81 in May 2022. The Company has 1.7 million businesses out of more than 28 million in Brazil, making for a large total addressable market (TAM). Growth is driven by converting more merchants to its platform and services and bolstering total payment value (TPV) since they take a fee as a percentage of payments. Prudent investors looking for a double-bottom recovery in Brazil’s economy, which is forecast to grow 1.7% in Q2 2022, can look for opportunistic pullbacks in shares of StoneCo.

Q1 Fiscal 2021 Earnings Release

On March 17, 2022, StoneCo released its fiscal first-quarter 2022 results for the quarter ending March  2022. The Company reported a profit of BRL 0.43 per share beating consensus analyst estimates for BRL 0.31 by BRL 0.12. Revenues rose 138.6% year-over-year (YoY) to BRL 2.07 billion beating analyst estimates for BRL 1.92 billion. StoneCo CEO Thiago Piau commented, “The first quarter results are the first step on this journey. Our growth engine, the central pillar of how we onboard and serve our clients, remains strong and we started to see margin recovery as evidenced by our first quarter Adjusted EBT margin of 7.9% up from 0.9% in the fourth quarter of 2021. The prudent price initiatives we implemented during the fourth quarter have continued to gain traction and the quality of our client base is improving, as expected.”

Upside Guidance

StoneCo issued upside guidance for fiscal Q2 2022 revenues to come in between BRL 2.15 to 2.20 billion versus BRL 2.02 billion consensus analyst estimates.

Conference Call Takeaways

CEO Piau confirmed that StoneCo is well-positioned for strong growth for both top and bottom lines in 2022. StoneCo was reorganized into two segments Financial Services and Software. Financial Services saw revenue growth of 107.8% driven by client monetization initiatives. The Company hit an all-time high revenue of BRL 2.1 billion. Revenue strength was driven by new pricing policies for higher client monetization and accelerated MSM TPV growth of 93%. Net addition of customers slowed down in the quarter due to the churn of lower-profitability clients. The Company expanded its banking platform with transactional products to drive higher engagements and opportunities for further monetization. The Software segment saw top line growth of 27% driven by the 32% growth in Core Software driven by new sales and higher ticket price per client. This also drove operating leverage with 12% adjusted EBITDA margin improving from 9% a year ago.

STNE Opportunistic Pullback Levels

We use the rifle charts on the weekly and daily time frames to provide a short-term perspective for STNE shares. The weekly rifle chart bottomed off the $6.81 Fibonacci (fib) level before staging a bounce. The weekly downtrend is flat with a flat 5-period moving average (MA) at $9.62 and flat 15-period MA at $10.18 but may be starting to form an inverse pup breakdown if the weekly stochastic crosses down. The weekly lower Bollinger Bands (BBs) sit at $6.27. The weekly market structure low (MSL) triggers on a breakout through $9.67. The daily rifle chart downtrend is attempting to reverse with a rising 5-period MA at $8.35 and overlapping 15-period MA at $9.42 and 50-period MA at 9.38. The daily stochastic is attempting a mini pup rising towards the 20-band for a make or break set-up. The daily lower BBs sit at $5.79 and upper BBs at $13.36. Prudent investors can watch for opportunistic pullback levels at the $7.75 fib, $7.46 fib, $6.81 fib, $6.24, $5.53, $4.60 fib, and the $3.96 fib. Upside trajectories range from the $11.88 fib level up towards the $17.22 fib level.