StoneCo (NASDAQ:STNE), which provides fintech services in Brazil,, has been in a tremendous slump. STNE stock collapsed from a high of $92 in early 2021 to just $15 by the end of the year. Today it’s changing hands for around $17.
There were good reasons for the steep decline. In fact, just about everything that could go wrong did go wrong for the company, both in terms of its underlying business and the sentiment towards its stock. As sectors such as payments and e-commerce got whacked in late 2021, the already considerable downward momentum in StoneCo’s share price intensified.
However, after stocks fall massively they often rebound sharply. So I believe that STNE stock still has a credible shot of recovering in 2022 and beyond.
Why Investors Are Nervous About Brazil
Brazil had an utterly horrible 2021. The country faced grave problems on almost every front.
In politics, uncertainty loomed and is still strong now. The approval ratings of President Jair Bolsonaro are dismal, partly due to his mishandling of the coronavirus crisis.
Critics say Bolsonaro has an authoritarian streak, and he made comments that some interpreted as indicating that he would support a coup if he loses Brazil’s upcoming presidential election. And it does appear as if Bolsonaro socialist opponent is likely to win that election, potentially resulting in Brazil’s government adopting leftist policies.
As if that wasn’t enough, inflation is surging in Brazil. The value of the Brazilian currency has plunged, and the nation’s central bank has had to raise interest rates at a stunning clip to try to combat inflation. The situation is horrible for StoneCo., which provides loans to Brazilians
Macroeconomic Factors Are Hurting StoneCo
StoneCo faced all sorts of setbacks in 2021. For one, its credit losses started to mount due to the coronavirus pandemic. Brazil chose not to heavily stimulate the economy. As a result, after a period of prolonged economic weakness, Brazilian consumers are showing signs of strain.
Additionally, StoneCo’s net interest margins have slumped. The company borrows money at relatively low interest rates and lends those funds to its customers at higher rates. However, because the Brazilian central bank hiked rates more than five percentage points in 2021, Stoneco’s own borrowing costs have jumped.
But the company hasn’t been able to raise rates for its customers to the same extent. If it had done so, it would have lost significant market share to other fintech firms. On top of that, with Brazil’s consumers struggling already, many of them would have trouble paying such high interest rates.
StoneCo has been hit with a combination of rising credit losses and falling profits on its performing loans .Consequently, its earnings will be a disaster in the short term. StoneCo’s profits have plunged, and investors have assumed that its business has been permanently damaged.
The Core Metrics Remain Promising
However, the company’s business appears to be resilient. StoneCo’s core metrics, such as the number of merchants on its platform and the number of transactions that it has handled. have risen sharply over the past 12 months.
If anything, StoneCo’s year-over-year growth, excluding acquisitions, has actually accelerated since the pandemic. That’s largely because its payments platform has attracted new merchants who, for the first time, needed contactless payments and/or e-commerce check-out options.
Now the question is if StoneCo can fix its problems. Since its core business is generally still growing rapidly. if it can return its interest margins and credit losses to their pre-pandemic levels, its earnings should rebound meaningfully.
Investors have very little confidence in the company’s management, judging by its stock price. However, these sorts of problems will always crop up for firms whose business is based in developing, volatile countries like Brazil. For investors who can’t stomach volatility, Brazilian stocks are probably not a good option.
StoneCo has been through economic ups and downs before, such as Brazil’s 2015 recession. The company has also attracted famous investors ,such as Warren Buffett’s Berkshire Hathaway (NYSE:BRK.B). StoneCo appears to be a fine firm that is being hurt by the type of periodic sharp setbacks that is common in emerging markets.
The Verdict on STNE Stock
The shares quadrupled from their March 2020 lows as they were lifted by the economic changes caused by the pandemic. As recently as early 2021, investors saw StoneCo as a clear beneficiary of the large, rapidly-growing Brazilian consumer economy.
Now apparently investors think it’s the end of the world for StoneCo, even though its user metrics keep rebounding. For investors who are willing to look past the company’s short-term earnings and cash flow volatility, there should be a large reward.
On the date of publication, Ian Bezek held long positions in BRK.B and STNE stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a sizable New York City-based hedge fund. You can reach him on Twitter at @irbezek.