Overall, for StoneCo, 2023 was a year of sharpening strategic focus (combined with organisational structure redesign, to deliver solutions more effectively across different client segments), and stricter cost management.
In this article, we discuss StoneCo’s:
overall developments & growth in long-term drivers & ROCE;
capital allocation & things for us investors to take note of;
credit business, which has been ramping up well, with conservative provisioning;
BOD changes, with cofounder Andre Street leaving the BOD; and
latest valuation.
Overall developments & growth in long-term drivers and ROCE
In 2023, StoneCo’s recent strategic focus and stricter cost management have helped to support robust growth in StoneCo’s key long-term drivers, and improving profitability and ROCE, where:
MSMB payments clients grew well, by 37% y/y or 6% q/q, to 3.47m at end 2023;
TPV grew well, with total TPV growing 11.2% y/y (to BRL 408b) in 2023, which was more than the industry growth rate of 10.1%. In 2023 Q4, the y/y growth rate of MSMB TPV (20% y/y) was more than twice the industry pace;
Take rate for MSMB improved from 2.15% in 2022 to 2.45% in 2023, supported by increasing clients’ engagement and adoption of different services offered by StoneCo (e.g. banking revenues);
With higher TPV and higher take rate, revenue grew by 26% y/y to BRL 12.1b;
Profitability improved well, due to higher take rates, improved efficiency or cost management, and decreasing interest rates, despite StoneCo’s conservatism in providing for loan losses (which increased cost of services). In 2023, its adjusted net profit margin (adjusted mainly for one-off or non-core items) improved y/y from 5.5% to 12.9% (or 17.4% in 2023 Q4).
This led to an adjusted net profit of BRL 1.56b, ~63% higher than its previous peak of BRL 0.96b in 2020 (before it got hit by credit business issues and interest rate hikes).
On its software segment, the software revenue was not growing well, up 5.1% y/y for the full year, but down 3.5% y/y or 6.4% q/q in 2023 Q4. Going forward, StoneCo is also not targeting high revenue growth for software, but would focus more on integrating its software & financial solutions in the 4 chosen priority verticals (Retail, Gas Stations, Food and Drugstores), and cross-selling efforts there, to drive TPV growth (which would increase payments revenue etc more, instead of software standalone revenue).
Overall, if we look at StoneCo’s whole business together, a positive development is that its ROCE (or rather, pre-tax ROE, as it has a lending business that we have to consider too) had improved y/y from 3.6% to 13.2% in 2023.
Excluding goodwill, the ROCE (or pre-tax ROE) had improved y/y from 6.4% to 21.5% in 2023, which was a pretty good level. This 21.5% is even higher than the 18.7% and 7.9% in 2019 and 2020 respectively, when its ROCE was partly supported by its credit business.
Capital allocation - Minor buybacks & deploying capital to Credit business
On capital allocation, it started returning some capital in 2023, which is good to see, that it’s open to returning capital when there are good opportunities. During the year, it spent BRL 0.3b (all in Q4) to repurchase 5.7m shares (so ~1.8% of total shares), averaging ~BRL 51 per share (or USD 10.4 per share).
At end 2023, it had adjusted net cash of ~BRL 5b, which was ~20% of its market cap of ~BRL 26b (or USD 5.3b) in late March 2024. Although it’s generating free cash flows, going forward, it prefers to reserve its capital to support its credit business which has been ramping up now, so we would have to monitor carefully the ROC generated on its credit business, to ensure that the capital is well deployed.
In particular, Pedro Zinner (the CEO) said that “in regards to capital allocation, you’re pretty spot on. So when you look at the cash generation of the company, the company has been consistently generating cash. First part we generated cash despite BRL 300 million in buybacks and also deploying capital in credits. And that’s why at the end of the day, we approved and announced a new BRL1 billion buyback plan in Investor Day [in November 2023], right?
I think the only question here is that we’re planning the execution of this buyback. And we also have to be mindful because when you look at the guidance, especially for the credit book, the BRL5.5 billion is a sizable increase versus what we have now. But it’s really small when compared to the overall credit markets in Brazil. So the only thing we need to be mindful in terms of capital allocation longer term is that if we get it right in terms of the credit, there is potentially a lot more to be done in terms of deploying credit there and we want to have this optionality in maintaining a really strong balance sheet.
So again, general terms, we’re aligning doing the buyback plan. It’s just a matter of planning the execution. And longer-term, we need to be mindful about the credit book.”
The following content is exclusive to paid subscribers of our Multibagger Research Series platform
Credit business ramping up well with conservative provisioning; accessible via this link.
BOD changes, with founder leaving the BOD; accessible via this link.
OE yield valuation; accessible via this link.
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Summary
Overall, StoneCo’s new CEO, Pedro Zinner, summarises StoneCo’s current developments well, per below, focusing on its long term prospects.
“When companies chase quick wins under market pressure, they risk their future. Growth isn’t just about speed; it’s also about sustainability. Fast growth can be tempting, but it’s not always right. At Stone, we’re playing the long game. We focus on building a solid company, not on boosting our stock price.
At Stone’s current scale, planting seeds that will grow into meaningful new businesses takes some discipline, a bit of patience, and a nurturing culture. Our established businesses are well-rooted young trees: they are growing, enjoy high returns on capital, and operate in growing market segments. These characteristics set a high bar for any new business we would start. Before we invest our shareholders’ money in a new business line or initiative, we must convince ourselves that the new opportunity is sizeable and can generate the returns on capital our investors expected when they invested in Stone.
In nearly every decision we make, there are factors we can control and predict – and others we can’t. Whether we realize it or not, we often engage in what Annie Duke, a scholar at the University of Pennsylvania and retired professional poker champion, calls “thinking in bets”. By embracing this mindset, we acknowledge uncertainty in our decision-making process, enabling us to better identify mistakes, recognize moments of luck, and become less susceptible to reactive emotions and destructive habits. Understanding this concept is crucial for comprehending how we allocate capital as we build our growth and new venture portfolio.”
Let us know if you have any questions or need any clarification regarding what we have discussed about StoneCo's 2023 earnings by commenting below.
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