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General Category => Investment Ideas => Topic started by: valueinvestor on February 10, 2019, 11:58:42 AM

Title: STNE - StoneCo Ltd
Post by: valueinvestor on February 10, 2019, 11:58:42 AM
I do not have any idea why Berkshire Hathaway invested in this stock, but the fact they invested in the IPO certainly made me pull the trigger when the stock went down 50% from IPO price. At the moment it is around a 30% discount from IPO price and valuation is subject to debate in my mind. I feel that there's a competitive advantage that I'm missing, such as health food snacks, where machines of traditional process snacks cannot manufacture, since the equipment is made solely for fructose syrup. Either way, I'm deciding whether I should sell, since it risen by almost 30% from my initial purchase. To my knowledge, they are a payment processing company that is growing incredible well, 100%+ yoy topline growth. Anyone has any insight to offer?
Title: Re: STNE - StoneCo Ltd
Post by: cameronfen on February 10, 2019, 12:54:59 PM
I think the thesis is that payments are under penatrated in Latin America/Brazil.  Basically a country like China is basically a cashless economy and everyone pays by smart phone apps.  Credit cards are even rarely used.  The reason is because phones are (slightly) more convinient, and because they dont need to link up to a bank account and build up the network like a credit card, the network is built by people downloading the app and linking there accounts.  Thus the main reason payment apps are superior is because compared to credit cards that charge 200-300 basis points to merchants, Alipay (i.e. ant financial) charges merchants 55 bps.  Thus for a developing country that doesnt have a history of credit card usage, smart phone apps are much more attractive.  Meanwhile despite only charging 55 bp, Alipay generates over 40 billion in revenue is worth 150 billion dollars.  Brazil's population is 1/6 of Chinas, so conceivably if it gets the same penatration, it could be worth 25 billion dollars.  If you want to compare it to paypal which probably covers a geographical area that skews developed countries and maybe 2.5x the pop of brazil, you have a valuation of 40 billion dollars.  At the same time this comparison is somewhat faulty bc paypal charges credit card like fees to merchants compared to 55 BP for alipay which is likely what stone co will roughly charge. 

other things going for it is it has the largest network in Brazil if I'm not mistaken, and so you have a virtuous flywheel with it having both the most number of merchants and consumers on the platform. 

The bear case is the valuation is very steep  at 25x revenue.  Additionally its unclear how profitable Alipay/Ant finicial will be.  Variable costs are low, but so is what it can charge merchants.  Although it seems like Stone seems to have high margins.  I'm not sure what competitors to stone look like, but Ant does compete with tencent, which may mean Stone is in a better position. 
Title: Re: STNE - StoneCo Ltd
Post by: Dalal.Holdings on February 10, 2019, 01:01:07 PM
Sounds like Buffett's buddy Jorge probably got him in on this.

In fact, looks like 3G is involved (https://www.bloomberg.com/news/articles/2018-10-22/alibaba-s-ant-financial-joins-buffett-in-hot-brazil-fintech-ipo).

Another richly valued payment processor. Certainly not traditional "value" investing, more like a VC bet if anything. Brazil not exactly stable either (ie. look at a 5 year chart of the Real to USD) and if EM's go south, it may not be a big winner in USD terms.
Title: Re: STNE - StoneCo Ltd
Post by: cameronfen on February 10, 2019, 01:29:42 PM
This inspired me to do some more digging as this has interested me on and off, (this is what I get for writing a post based on research I did 3 or 4 months ago), and just to clarify stone is more like paypal and square than ant. But the idea is still the same, you want to undercut the cost and price of financial transactions by moving things over the internet instead of middlemen.

Macro conditions in Brazil are definitely an issue. 
Title: Re: STNE - StoneCo Ltd
Post by: Munger_Disciple on February 10, 2019, 03:30:07 PM
IIRC it was a Todd Combs purchase. The position size is $300M, so inconsequential to Berkshire as a whole. Todd seems to invest in VC type deals recently. He also invested in Paytm, an Alipay like service in India in a private financing round. Paytm is backed by both Alibaba and Softbank.
Title: Re: STNE - StoneCo Ltd
Post by: gfp on February 10, 2019, 05:23:32 PM
"Mr. Combs was introduced to Stone by fellow shareholders Madrone Capital Partners, an investment firm affiliated with the heirs to Walmart Inc. founder Sam Walton, and T. Rowe Price Group Inc., according to a person familiar with the matter.

“We saw Berkshire as a very long-term investor,” said Thiago dos Santos Piau, Stone’s CEO, in an interview.

Mr. Buffett declined to comment on the Stone deal. “It’s entirely Todd’s,” said Debbie Bosanek, Mr. Buffett’s assistant, in an email. “He never comments on anything that Todd or Ted do. They have total autonomy.”"

https://www.wsj.com/articles/warren-buffetts-firm-invests-millions-in-fintech-1540807200


Sounds like Buffett's buddy Jorge probably got him in on this.

In fact, looks like 3G is involved (https://www.bloomberg.com/news/articles/2018-10-22/alibaba-s-ant-financial-joins-buffett-in-hot-brazil-fintech-ipo).

Another richly valued payment processor. Certainly not traditional "value" investing, more like a VC bet if anything. Brazil not exactly stable either (ie. look at a 5 year chart of the Real to USD) and if EM's go south, it may not be a big winner in USD terms.
Title: Re: STNE - StoneCo Ltd
Post by: RadMan24 on February 10, 2019, 07:50:18 PM
Have you read the prospectus? You'd get more info there than anywhere else.

All you need to know its the first time I've seen " no bull shit" in a filing.

In all seriousness, I got interested for same reason. It took a while to get my head around it, but do the following:

Then sit back and think. It'll come to you.
Title: Re: STNE - StoneCo Ltd
Post by: valueinvestor on February 10, 2019, 08:19:58 PM
Have you read the prospectus? You'd get more info there than anywhere else.

All you need to know its the first time I've seen " no bull shit" in a filing.

In all seriousness, I got interested for same reason. It took a while to get my head around it, but do the following:
  • Read the prospectus and all recent filings and recent earnings call.

  • Read about the big Brazil payment processors, just in general, the payment processor industry in the mid to small business market (i.e. neglected market, several years of recession, stoneco offers improved working capital management, lowers cost and friction with customers, boosts sales, keeps customers happy with excellent service, repeat).

    • Read about Square.

    • And watch for inflection point in earnings. StoneCo could earn $1b reals in the new fiscal year.

Then sit back and think. It'll come to you.

Haha, this is probably one of the best post I've read in CoBF.
Title: Re: STNE - StoneCo Ltd
Post by: Jurgis on February 13, 2019, 12:04:28 PM
Have you read the prospectus? You'd get more info there than anywhere else.

All you need to know its the first time I've seen " no bull shit" in a filing.

In all seriousness, I got interested for same reason. It took a while to get my head around it, but do the following:
  • Read the prospectus and all recent filings and recent earnings call.

  • Read about the big Brazil payment processors, just in general, the payment processor industry in the mid to small business market (i.e. neglected market, several years of recession, stoneco offers improved working capital management, lowers cost and friction with customers, boosts sales, keeps customers happy with excellent service, repeat).

    • Read about Square.

    • And watch for inflection point in earnings. StoneCo could earn $1b reals in the new fiscal year.

Then sit back and think. It'll come to you.

What do you think about competition? https://seekingalpha.com/article/4240488-comparing-pagseguro-stoneco-square
Title: Re: STNE - StoneCo Ltd
Post by: Spekulatius on February 14, 2019, 04:28:45 AM
There is also Cielo, the large incumbent, which reports competitive pressure (presumably from Stoneco and Pagsugero. Seems like and interesting industry.

https://finance.yahoo.com/quote/CIOXY?p=CIOXY (https://finance.yahoo.com/quote/CIOXY?p=CIOXY)
Title: Re: STNE - StoneCo Ltd
Post by: RadMan24 on February 20, 2019, 09:28:59 PM
The incumbents will be lowering price, but that's because they're being disrupted and don't have a solution.

The SA article referenced above points out a few differences between Stone and Pags.
1.) Stone is lower priced but has better TPV (again reference STNE's growth rates in the coming quarters)
2.) Stone is built on customer service first, no one else is (why is this important?)
3.) Stone's ecosystem is more "open" resulting in other service providers offering solutions to on Stone's platform (also provides for potential vertical acquisitions)
3.) Stone's business model may end up being more stickier than incumbents and Pags.

PAGS is nice, but I rather not have to worry about management focusing b/w consumer and merchant aspects. Square changed its business model which is often underrated how great of a strategic move it was. The PAGS to Square comparison isn't as strong as many believe it is (often cited for valuation reasons).

Just for fun, StoneCo's explanation of culture from prospectus:
 
         *  The Reason—Our culture is centered on the fundamental belief that our clients drive everything we do. We also emphasize to our clients that, like them, we have also worked hard to start and grow a new business. We believe that building and maintaining close and active relationships with our clients will improve our ability to innovate, expand our leadership in the market, and grow our business.

     •    Own It—We expect that all employees present an “owner” mindset and use their intelligence to resolve problems with a primary focus on making our clients’ experience great. We constantly strive to recognize exceptional achievement.

     •    No Bullshit—We encourage respectful candor in all interactions and aim to be straight to the point. We criticize ideas, not people. We expect our teams to always choose the correct path, not the quickest.

     •    Team Play—We have learned that people achieve greater results together. We believe that more ideas flourish, are debated better, and questioned more effectively in teams. As a result, we strive to work together and constantly look for people with complementary skills to join our team.

    •   Live the Ride—We believe we will evolve more effectively by trying new ideas and improving on them with energy and passion. New ideas need to be tested in a controlled way, and only scaled once they have demonstrated authentic promise.

https://www.sec.gov/Archives/edgar/data/1745431/000119312518309043/d580263d424b4.htm

Title: Re: STNE - StoneCo Ltd
Post by: RadMan24 on March 18, 2019, 08:39:27 PM
The inflection point appears to have arrived.

I’d be damned if the stock was weighed down simply because of competition concerns, market may readjust.

https://investors.stone.co/news-releases/news-release-details/stoneco-reports-fourth-quarter-and-fiscal-year-2018-financial


Title: Re: STNE - StoneCo Ltd
Post by: scorpioncapital on March 19, 2019, 05:42:15 AM
Most likely I'm missing something but they earned something like 75 million usd in 2018 and have a market cap of 10 billion or 133x earning?
Title: Re: STNE - StoneCo Ltd
Post by: cameronfen on March 19, 2019, 07:39:16 AM
Most likely I'm missing something but they earned something like 75 million usd in 2018 and have a market cap of 10 billion or 133x earning?

They are growing at 100+% a year.  Fourth quarter earnings was around 40 million by itself.  Valuation is high no way around it. 
Title: Re: STNE - StoneCo Ltd
Post by: valueinvestor on April 18, 2019, 06:45:09 AM
Down 18%
Title: Re: STNE - StoneCo Ltd
Post by: cameronfen on April 18, 2019, 06:58:58 AM
Down 18%

You know of any reason why? Obviously it's very expensive and I think it's market value is close to the value of the company (discounted) when it saturates the market. 
Title: Re: STNE - StoneCo Ltd
Post by: gfp on April 18, 2019, 07:02:59 AM
Down 18%

You know of any reason why? Obviously it's very expensive and I think it's market value is close to the value of the company (discounted) when it saturates the market.

As far as 'reason why,' I imagine it is related to the Morgan Stanley comment on Itau -

https://www.benzinga.com/markets/wiim/19/04/13559775/stoneco-shares-are-trading-lower-following-a-comment-from-morgan-stanley-highlighting-news-that-braz

There may also be speculation about shareholder lockup expiring
Title: Re: STNE - StoneCo Ltd
Post by: valueinvestor on April 18, 2019, 07:10:14 AM
Down 18%

You know of any reason why? Obviously it's very expensive and I think it's market value is close to the value of the company (discounted) when it saturates the market.

Not sure but increased my position by 20%, since markets typically overreacts either side of the swing. Also my cost basis was really low, which helps. As for the reason why, it may be a revaluation. I do not think it says anything about the business' intrinsic value. Just that the business' intrinsic value is way lower than the market price right now.

However, I have a feeling it may be one of those situations like Netflix where valuation-wise it made no sense, but in hindsight it would've been a good investment and you're closer to seeing the endgame of these companies.

In short, I do not have any tangible reason why this stock may not go to zero.
Title: Re: STNE - StoneCo Ltd
Post by: freddy02 on April 18, 2019, 07:37:35 AM
"Starting May 2, merchants processing credit-card transactions using a Rede POS and who agree to get paid through a Itaú bank account will get paid through a Itaú bank account will get the funds in just two days at zero cost "

Leia mais em https://braziljournal.com/itau-has-just-escalated-the-war-against-stone-and-pagseguro-and-they-plan-to-react
Title: Re: STNE - StoneCo Ltd
Post by: PLynchJr on April 18, 2019, 07:46:44 AM
Roughly 50% of their revenue comes from financial income (interest on pre-payments to merchants).  Seems like a big deal to me.
Title: Re: STNE - StoneCo Ltd
Post by: cameronfen on April 18, 2019, 08:02:49 AM
I was long stne and still long a tracking position, but shifted to PAGS due to valuation.  Maybe not exiting after this drop as this seems like an over-response, but I think the market is close to valuing this correctly now.  The retail market in Brazil has 1 trillion in sales a year (source: https://www.statista.com/statistics/233086/total-of-retail-net-sales-in-brazil/).  I'd say 50% of sales roughly would be a target for payments processing.  The others are too big or do different things.  Although this is roughly in line with Squares TAM GPV over total US retail sales (see slide 8 here: https://d1g145x70srn7h.cloudfront.net/documents/investor-relations/presentations/2019-02-overview.pdf and google for total US retail sales), this is just a number I pulled out of my hat though keep in mind.  The take is roughly 2% for both (or will be 2% soon enough), and so they would generate 10 billion in revenue.  There margins are about 30%.  So that is about 3 billion which supports a combined market cap of 30 billion at a 10 multiple.  Discount it back 7 or so odd years and you get a combined MC for PAGS and STNE of about 15 billion which is where we are at.  Some things this model is missing, other competitors like Itau and Cielo.  Maybe fatter net margins as STNE is almost at 50% and they may gain more with scale.  But I think to first order combined the companies are approximately fairly valued IMO. 
Title: Re: STNE - StoneCo Ltd
Post by: valueinvestor on April 18, 2019, 08:17:58 AM
Roughly 50% of their revenue comes from financial income (interest on pre-payments to merchants).  Seems like a big deal to me.

Does not really bother me much, as typically when businesses do that it is because they are lazy or they think they will win by trying to undercut the competition. Which never works over the long term. I do not think the business is easy replicable, as one may think, nor destroyed because of lower/free prices. 

I was long stne and still long a tracking position, but shifted to PAGS due to valuation.  Maybe not exiting after this drop as this seems like an over-response, but I think the market is close to valuing this correctly now.  The retail market in Brazil has 1 trillion in sales a year (source: https://www.statista.com/statistics/233086/total-of-retail-net-sales-in-brazil/).  I'd say 50% of sales roughly would be a target for payments processing.  The others are too big or do different things.  Although this is roughly in line with Squares TAM GPV over total US retail sales (see slide 8 here: https://d1g145x70srn7h.cloudfront.net/documents/investor-relations/presentations/2019-02-overview.pdf and google for total US retail sales), this is just a number I pulled out of my hat though keep in mind.  The take is roughly 2% for both (or will be 2% soon enough), and so they would generate 10 billion in revenue.  There margins are about 30%.  So that is about 3 billion which supports a combined market cap of 30 billion at a 10 multiple.  Discount it back 7 or so odd years and you get a combined MC for PAGS and STNE of about 15 billion which is where we are at.  Some things this model is missing, other competitors like Itau and Cielo.  Maybe fatter net margins as STNE is almost at 50% and they may gain more with scale.  But I think to first order combined the companies are approximately fairly valued IMO. 

Not in that detail, but I had the same hunch and more than happy to be pay fair value for Stone.
Title: Re: STNE - StoneCo Ltd
Post by: Casey on April 19, 2019, 12:32:18 PM
https://apnews.com/GlobeNewswire/efea9f06dc092e0a9c082184ef663a6e

StoneCo Ltd. Releases CEO Letter to Shareholders.
Title: Re: STNE - StoneCo Ltd
Post by: vince on April 22, 2019, 09:40:12 AM
I have only done a bit of work on this name after the price fell but it seems to me that they are trying to be much more than just a payments business.  And their whole hub distribution strategy for a developing country and how they will try and cross sell software and banking products to a less sophisticated merchant that has been ripped off for ages is brilliant IMO.  Incredible opportunity for them with recent growth rates that suggest they understand the end market needs very well.
Title: Re: STNE - StoneCo Ltd
Post by: vince on April 22, 2019, 12:02:25 PM
Also, I do think that competitive responses from large incumbent players will probably affect Stones growth rate but the differentiated way they support their clients makes cut throat pricing by competitors less relevant.  Although it's early I see a successful model that can be applied to other developing nations in that part of the world
Title: Re: STNE - StoneCo Ltd
Post by: Spekulatius on April 22, 2019, 01:45:13 PM
I was long stne and still long a tracking position, but shifted to PAGS due to valuation.  Maybe not exiting after this drop as this seems like an over-response, but I think the market is close to valuing this correctly now.  The retail market in Brazil has 1 trillion in sales a year (source: https://www.statista.com/statistics/233086/total-of-retail-net-sales-in-brazil/).  I'd say 50% of sales roughly would be a target for payments processing.  The others are too big or do different things.  Although this is roughly in line with Squares TAM GPV over total US retail sales (see slide 8 here: https://d1g145x70srn7h.cloudfront.net/documents/investor-relations/presentations/2019-02-overview.pdf and google for total US retail sales), this is just a number I pulled out of my hat though keep in mind.  The take is roughly 2% for both (or will be 2% soon enough), and so they would generate 10 billion in revenue.  There margins are about 30%.  So that is about 3 billion which supports a combined market cap of 30 billion at a 10 multiple.  Discount it back 7 or so odd years and you get a combined MC for PAGS and STNE of about 15 billion which is where we are at.  Some things this model is missing, other competitors like Itau and Cielo.  Maybe fatter net margins as STNE is almost at 50% and they may gain more with scale.  But I think to first order combined the companies are approximately fairly valued IMO.

How do you account for Cielo as well as the banks that are also into payment processing. It looks like those won’t just roll over and take rate is you g down to the benefit of the customer. Both ITUB, Cielo as well as the other banks are well financed, so they can afford to compete on price to stem market share losses.
Title: Re: STNE - StoneCo Ltd
Post by: vince on April 22, 2019, 02:55:56 PM
I was long stne and still long a tracking position, but shifted to PAGS due to valuation.  Maybe not exiting after this drop as this seems like an over-response, but I think the market is close to valuing this correctly now.  The retail market in Brazil has 1 trillion in sales a year (source: https://www.statista.com/statistics/233086/total-of-retail-net-sales-in-brazil/).  I'd say 50% of sales roughly would be a target for payments processing.  The others are too big or do different things.  Although this is roughly in line with Squares TAM GPV over total US retail sales (see slide 8 here: https://d1g145x70srn7h.cloudfront.net/documents/investor-relations/presentations/2019-02-overview.pdf and google for total US retail sales), this is just a number I pulled out of my hat though keep in mind.  The take is roughly 2% for both (or will be 2% soon enough), and so they would generate 10 billion in revenue.  There margins are about 30%.  So that is about 3 billion which supports a combined market cap of 30 billion at a 10 multiple.  Discount it back 7 or so odd years and you get a combined MC for PAGS and STNE of about 15 billion which is where we are at.  Some things this model is missing, other competitors like Itau and Cielo.  Maybe fatter net margins as STNE is almost at 50% and they may gain more with scale.  But I think to first order combined the companies are approximately fairly valued IMO.

How do you account for Cielo as well as the banks that are also into payment processing. It looks like those won’t just roll over and take rate is you g down to the benefit of the customer. Both ITUB, Cielo as well as the other banks are well financed, so they can afford to compete on price to stem market share losses.

I know the question wasn't directed to me but Stne's operating metrics are accelerating after the initial competitive discounting.  It's still early but that is strong support for their claim of a superior value proposition.  However, deep discounting, in whatever form will most certainly affect their growth rate at some point but it looks to me like they have some very interesting opportunities in related products and services and opportunities outside Brazil as well.  I would absolutely be thinking about my business in a different way if I was an incumbent anywhere near Brazil's borders.  Also, I think it's important to note that the regulatory body may look at the latest competitive offer as anti-competitive.
Title: Re: STNE - StoneCo Ltd
Post by: cameronfen on April 22, 2019, 03:43:53 PM
I was long stne and still long a tracking position, but shifted to PAGS due to valuation.  Maybe not exiting after this drop as this seems like an over-response, but I think the market is close to valuing this correctly now.  The retail market in Brazil has 1 trillion in sales a year (source: https://www.statista.com/statistics/233086/total-of-retail-net-sales-in-brazil/).  I'd say 50% of sales roughly would be a target for payments processing.  The others are too big or do different things.  Although this is roughly in line with Squares TAM GPV over total US retail sales (see slide 8 here: https://d1g145x70srn7h.cloudfront.net/documents/investor-relations/presentations/2019-02-overview.pdf and google for total US retail sales), this is just a number I pulled out of my hat though keep in mind.  The take is roughly 2% for both (or will be 2% soon enough), and so they would generate 10 billion in revenue.  There margins are about 30%.  So that is about 3 billion which supports a combined market cap of 30 billion at a 10 multiple.  Discount it back 7 or so odd years and you get a combined MC for PAGS and STNE of about 15 billion which is where we are at.  Some things this model is missing, other competitors like Itau and Cielo.  Maybe fatter net margins as STNE is almost at 50% and they may gain more with scale.  But I think to first order combined the companies are approximately fairly valued IMO.

How do you account for Cielo as well as the banks that are also into payment processing. It looks like those won’t just roll over and take rate is you g down to the benefit of the customer. Both ITUB, Cielo as well as the other banks are well financed, so they can afford to compete on price to stem market share losses.

So this comment was to illustrate that the company was fairly valued and therefore not a buy (and was back of the envelope).  These other factors you mention would make this more likely so.  Bulls likely point to the hub system for STNE and the higher margins for both companies than 30%.  Also a 10 multiple is quite low.  Additionally, 50% ratio of TAM/total Retail sales as SQ has a higher ratio (in an ir marketing presentation though) and a country like Brazil that is emerging probably has a higher ration than the US which big companies probably dominate. 

Edit: In addition to vince's hub comments.  But I agree I think I was more conservative in overvaluing it than under and even then it comes out not really a buy. 
Title: Re: STNE - StoneCo Ltd
Post by: vince on April 22, 2019, 04:30:04 PM
I was long stne and still long a tracking position, but shifted to PAGS due to valuation.  Maybe not exiting after this drop as this seems like an over-response, but I think the market is close to valuing this correctly now.  The retail market in Brazil has 1 trillion in sales a year (source: https://www.statista.com/statistics/233086/total-of-retail-net-sales-in-brazil/).  I'd say 50% of sales roughly would be a target for payments processing.  The others are too big or do different things.  Although this is roughly in line with Squares TAM GPV over total US retail sales (see slide 8 here: https://d1g145x70srn7h.cloudfront.net/documents/investor-relations/presentations/2019-02-overview.pdf and google for total US retail sales), this is just a number I pulled out of my hat though keep in mind.  The take is roughly 2% for both (or will be 2% soon enough), and so they would generate 10 billion in revenue.  There margins are about 30%.  So that is about 3 billion which supports a combined market cap of 30 billion at a 10 multiple.  Discount it back 7 or so odd years and you get a combined MC for PAGS and STNE of about 15 billion which is where we are at.  Some things this model is missing, other competitors like Itau and Cielo.  Maybe fatter net margins as STNE is almost at 50% and they may gain more with scale.  But I think to first order combined the companies are approximately fairly valued IMO.

How do you account for Cielo as well as the banks that are also into payment processing. It looks like those won’t just roll over and take rate is you g down to the benefit of the customer. Both ITUB, Cielo as well as the other banks are well financed, so they can afford to compete on price to stem market share losses.

So this comment was to illustrate that the company was fairly valued and therefore not a buy (and was back of the envelope).  These other factors you mention would make this more likely so.  Bulls likely point to the hub system for STNE and the higher margins for both companies than 30%.  Also a 10 multiple is quite low.  Additionally, 50% ratio of TAM/total Retail sales as SQ has a higher ratio (in an ir marketing presentation though) and a country like Brazil that is emerging probably has a higher ration than the US which big companies probably dominate. 

Edit: In addition to vince's hub comments.  But I agree I think I was more conservative in overvaluing it than under and even then it comes out not really a buy.

Cam I don't necessarily disagree with your analysis but I read every post on Stne subject and I don't recall anyone mentioning the other products and services that are ready to scale or are in trials.  Based on their relationships, their understanding of their end market needs and their execution up until now I think it's a fair assumption that their sandbox could me much larger.  They also mentioned their aspirations to grow outside Brazil.  I'm not arguing that this should change their valuation at this point but if one was trying to estimate an upper range for possible future revenues I think it would be wise to include
Title: Re: STNE - StoneCo Ltd
Post by: Spekulatius on April 22, 2019, 04:42:18 PM
I think it is important to note that Brazil banks are not doing too well, ITUB currently sits at a 52week low. Apparent reason seems to be NIM compression , because Brazil’s interest rates have fallen from 14% to ~7%. I guess that is hurting the payment processors as well, since they make their living partly from the float. FWIW, the large incumbent Cielo trades at a PE of 6.5x, which clearly indicates a very dim near term outlook.
Title: Re: STNE - StoneCo Ltd
Post by: cameronfen on April 22, 2019, 05:22:25 PM
I was long stne and still long a tracking position, but shifted to PAGS due to valuation.  Maybe not exiting after this drop as this seems like an over-response, but I think the market is close to valuing this correctly now.  The retail market in Brazil has 1 trillion in sales a year (source: https://www.statista.com/statistics/233086/total-of-retail-net-sales-in-brazil/).  I'd say 50% of sales roughly would be a target for payments processing.  The others are too big or do different things.  Although this is roughly in line with Squares TAM GPV over total US retail sales (see slide 8 here: https://d1g145x70srn7h.cloudfront.net/documents/investor-relations/presentations/2019-02-overview.pdf and google for total US retail sales), this is just a number I pulled out of my hat though keep in mind.  The take is roughly 2% for both (or will be 2% soon enough), and so they would generate 10 billion in revenue.  There margins are about 30%.  So that is about 3 billion which supports a combined market cap of 30 billion at a 10 multiple.  Discount it back 7 or so odd years and you get a combined MC for PAGS and STNE of about 15 billion which is where we are at.  Some things this model is missing, other competitors like Itau and Cielo.  Maybe fatter net margins as STNE is almost at 50% and they may gain more with scale.  But I think to first order combined the companies are approximately fairly valued IMO.

How do you account for Cielo as well as the banks that are also into payment processing. It looks like those won’t just roll over and take rate is you g down to the benefit of the customer. Both ITUB, Cielo as well as the other banks are well financed, so they can afford to compete on price to stem market share losses.

So this comment was to illustrate that the company was fairly valued and therefore not a buy (and was back of the envelope).  These other factors you mention would make this more likely so.  Bulls likely point to the hub system for STNE and the higher margins for both companies than 30%.  Also a 10 multiple is quite low.  Additionally, 50% ratio of TAM/total Retail sales as SQ has a higher ratio (in an ir marketing presentation though) and a country like Brazil that is emerging probably has a higher ration than the US which big companies probably dominate. 

Edit: In addition to vince's hub comments.  But I agree I think I was more conservative in overvaluing it than under and even then it comes out not really a buy.

Cam I don't necessarily disagree with your analysis but I read every post on Stne subject and I don't recall anyone mentioning the other products and services that are ready to scale or are in trials.  Based on their relationships, their understanding of their end market needs and their execution up until now I think it's a fair assumption that their sandbox could me much larger.  They also mentioned their aspirations to grow outside Brazil.  I'm not arguing that this should change their valuation at this point but if one was trying to estimate an upper range for possible future revenues I think it would be wise to include

Sure you may be right about new products but I am unaware (and I don't think it was mentioned in the board).  Excuse my ignorance but what products are ready to scale and on trials? 

About extrapolations of TAM, sure I may not have been aggressive enough in their market cap forecast but at the same time, I don't think it is wise to give to much credit for things management promises to do (including how "innovative" their hub model is).  It's easy for management to promise new products to make TAM look bigger, but much more difficult to execute.  Maybe their hub model is really innovative, but it's more likely someone else would have successfully used this and became successful if it's that much better than the competition.  I think ignoring Cielo and Itau, is still probably a more glaring omission than these trials.  Maybe moving to other countries is a "blue sky" possibility though.  Again while I was trying to be aggressive with the market cap projection, the end goal was to decide whether to invest or not, so I'm wasn't planning on throwing every possible thing going right into the valuation. 

Again my philosophy, mostly because I'm lazy and busy, is to be do back of envelope calcs to just varify thoughts.  I'm not going to go through and get a percise valuation from a DCF with every possible outcome considered.  Plenty more to add to this valuation if you want to. 
Title: Re: STNE - StoneCo Ltd
Post by: vince on April 22, 2019, 06:38:36 PM
I was long stne and still long a tracking position, but shifted to PAGS due to valuation.  Maybe not exiting after this drop as this seems like an over-response, but I think the market is close to valuing this correctly now.  The retail market in Brazil has 1 trillion in sales a year (source: https://www.statista.com/statistics/233086/total-of-retail-net-sales-in-brazil/).  I'd say 50% of sales roughly would be a target for payments processing.  The others are too big or do different things.  Although this is roughly in line with Squares TAM GPV over total US retail sales (see slide 8 here: https://d1g145x70srn7h.cloudfront.net/documents/investor-relations/presentations/2019-02-overview.pdf and google for total US retail sales), this is just a number I pulled out of my hat though keep in mind.  The take is roughly 2% for both (or will be 2% soon enough), and so they would generate 10 billion in revenue.  There margins are about 30%.  So that is about 3 billion which supports a combined market cap of 30 billion at a 10 multiple.  Discount it back 7 or so odd years and you get a combined MC for PAGS and STNE of about 15 billion which is where we are at.  Some things this model is missing, other competitors like Itau and Cielo.  Maybe fatter net margins as STNE is almost at 50% and they may gain more with scale.  But I think to first order combined the companies are approximately fairly valued IMO.

How do you account for Cielo as well as the banks that are also into payment processing. It looks like those won’t just roll over and take rate is you g down to the benefit of the customer. Both ITUB, Cielo as well as the other banks are well financed, so they can afford to compete on price to stem market share losses.

So this comment was to illustrate that the company was fairly valued and therefore not a buy (and was back of the envelope).  These other factors you mention would make this more likely so.  Bulls likely point to the hub system for STNE and the higher margins for both companies than 30%.  Also a 10 multiple is quite low.  Additionally, 50% ratio of TAM/total Retail sales as SQ has a higher ratio (in an ir marketing presentation though) and a country like Brazil that is emerging probably has a higher ration than the US which big companies probably dominate. 

Edit: In addition to vince's hub comments.  But I agree I think I was more conservative in overvaluing it than under and even then it comes out not really a buy.

Cam I don't necessarily disagree with your analysis but I read every post on Stne subject and I don't recall anyone mentioning the other products and services that are ready to scale or are in trials.  Based on their relationships, their understanding of their end market needs and their execution up until now I think it's a fair assumption that their sandbox could me much larger.  They also mentioned their aspirations to grow outside Brazil.  I'm not arguing that this should change their valuation at this point but if one was trying to estimate an upper range for possible future revenues I think it would be wise to include

Sure you may be right about new products but I am unaware (and I don't think it was mentioned in the board).  Excuse my ignorance but what products are ready to scale and on trials? 

About extrapolations of TAM, sure I may not have been aggressive enough in their market cap forecast but at the same time, I don't think it is wise to give to much credit for things management promises to do (including how "innovative" their hub model is).  It's easy for management to promise new products to make TAM look bigger, but much more difficult to execute.  Maybe their hub model is really innovative, but it's more likely someone else would have successfully used this and became successful if it's that much better than the competition.  I think ignoring Cielo and Itau, is still probably a more glaring omission than these trials.  Maybe moving to other countries is a "blue sky" possibility though.  Again while I was trying to be aggressive with the market cap projection, the end goal was to decide whether to invest or not, so I'm wasn't planning on throwing every possible thing going right into the valuation. 

Again my philosophy, mostly because I'm lazy and busy, is to be do back of envelope calcs to just varify thoughts.  I'm not going to go through and get a percise valuation from a DCF with every possible outcome considered.  Plenty more to add to this valuation if you want to.

Cam, I'm not trying to hype up this business and like I said, I don't necessarily disagree with your valuation.  But I do think that if you read all of the available material you would have a different view on their various opportunities.  And yes I am surprised also that nobody talks about their push into other products (enterprise software, credit and banking) but they are real, coming to market soon and are talked about very much by mgmt in response to analyst questions and are dealt with in detail in their quarterly presentations.  Normally I wouldn't give much, if any, weight to these but with their track record of execution and straightforward communications I think it's a big mistake to ignore.  I also think you may be underestimating their hub strategy of being close to the customer and focusing on prompt and consistent support which by the way would bolster their multi-product strategy. I mean how do you account for the remarkable success of their business in 4 short years?  In effect, they are being paid with business to educate these merchants (one incumbent remarked that it's a waste to educate the merchants cause they couldn't read anyway) on how hard they have been screwed.  And they see a big opportunity with software solutions (32,000 of their clients now use at least one of their software products up from 14,000 when they acquired a software firm with 18,000 clients) for the same reason.  They think the merchants are eager for better and more efficient business building and the incumbents have no answer but to cut prices.  Every business worries to a certain extent of some irrational competitor but how low and for how long can they go?  Just the mere fact that incumbents have aggressively adjusted their pricing shows that they know they are being disrupted.  And I think some people believe that Stne is disrupting with pricing but that is not the case (even sounds like Stne is the high price right now)  They are simply giving the clients a superior value proposition for similar pricing.  An earlier poster (Red.... was his name) suggested to read the available material on the business and generally read about the industry and competition and the thesis would come to us as it did him....and I agree with him.  The history of the industry, the comfortable incumbents, the secular tailwind, the changing regulations, the unserved, unhappy clients, and the hungry, fresh eyed disrupters combine to produce the results that Stne is.  Munger has repeated multiple times that results such as these are caused by a lollapalooza effect and thats just what I see.  However, I'm going to hedge my post by saying that the price is expensive looking.....it's much easier to look skilled as an investor long term buying a defensible business at 10 times cash earnings thats virtually guaranteed to grow along with nominal GDP without much additional incremental capital needed to achieve that growth than it is to buy a business at 40-50 times earnings no matter what the growth rate looks like.  So in the end I kind of agree with you except to say that if you were going to try and play the high growth-high multiple game this looks like a good one to me.
Title: Re: STNE - StoneCo Ltd
Post by: cameronfen on April 22, 2019, 07:32:43 PM
Regarding the above^^, so you may be right, but again I think buying a company that is trading at a quarter of square's valuation (square being the developed country counterpart) puts some sort of ceiling for STNE.  I don't think management has proven to be genius as PAGS suggests it is the business model that is generating a lot of the growth (although STNE is growing faster).  You may be right that there is lots of growth around the corner with there new products, and management is hyping it based on at least Q4 power-point updates (looking at them again), but I'm not sure if they can execute.  As perhaps you are aware I am interested in other high flyers, but typically unless there is some blueprint for success for a firm (say other companies have already charted a viable path). 

Again back of the envelope quick math for the auxiliary businesses (happy to be corrected if I'm wrong about this).  Banking and Credit is 85 billion real opportunity.  NIM for banks (after adjusting for Brazilian inflation) is 3% (derived by looking at itau NIM and removing the increase in inflation Brazil has as the value of company will be in usd).  This comes out to 2.5b real in profit or 600m usd.  This adds maybe 6 billion usd in market cap if it works. 

Software is probably more lucrative.  I'm going to use Salesforce's net profit margin (after adjusting for marketing spend by reducing it to Oracles marketing expense/revenue).  If we assume 20% or revenue is spent on marketing (what Oracle spends) then CRMs profit is about 3.2b.  Take over 13.3b in revenue and you have a net margin of about 25%.  Which comes out to another 2.5b real.  This could be significantly higher as STNE and PAGS are surprisingly profitable compared to SQ.  Why?  I don't know.  Could that carry over to other software markets (maybe? idk?).  Again both these verticals look interesting, but its not the 5x market cap multiplier management wants you to believe when they say the TAM is 5x bigger. 

Both of these add about 12-18b in market cap if they both work.  They should be discounted by time and by probability of success (which I'm not sure how to model).  This is just my first shot and building a model.  I have not looked at the other products in any depth compared to others.  Let me know if there are mistakes.  This is interesting though and if there is proof of strong execution I may take another opportunity to buy in. 

I don't know if you are aware of my other high multiple stocks I like, but I tend to view the other companies as comps not so much by applying comp multiples, but as tools to figure out how the business will progress based on more mature companies.  I tend to like companies where there already is a "blueprint" for success based on other companies in other countries or vertices.  Here though, I don't know what blueprint to evaluate this cross-selling probability of success against, so it's difficult to convince justify risking money.   
Title: Re: STNE - StoneCo Ltd
Post by: vince on April 22, 2019, 10:12:31 PM
Regarding the above^^, so you may be right, but again I think buying a company that is trading at a quarter of square's valuation (square being the developed country counterpart) puts some sort of ceiling for STNE.  I don't think management has proven to be genius as PAGS suggests it is the business model that is generating a lot of the growth (although STNE is growing faster).  You may be right that there is lots of growth around the corner with there new products, and management is hyping it based on at least Q4 power-point updates (looking at them again), but I'm not sure if they can execute.  As perhaps you are aware I am interested in other high flyers, but typically unless there is some blueprint for success for a firm (say other companies have already charted a viable path). 

Again back of the envelope quick math for the auxiliary businesses (happy to be corrected if I'm wrong about this).  Banking and Credit is 85 billion real opportunity.  NIM for banks (after adjusting for Brazilian inflation) is 3% (derived by looking at itau NIM and removing the increase in inflation Brazil has as the value of company will be in usd).  This comes out to 2.5b real in profit or 600m usd.  This adds maybe 6 billion usd in market cap if it works. 

Software is probably more lucrative.  I'm going to use Salesforce's net profit margin (after adjusting for marketing spend by reducing it to Oracles marketing expense/revenue).  If we assume 20% or revenue is spent on marketing (what Oracle spends) then CRMs profit is about 3.2b.  Take over 13.3b in revenue and you have a net margin of about 25%.  Which comes out to another 2.5b real.  This could be significantly higher as STNE and PAGS are surprisingly profitable compared to SQ.  Why?  I don't know.  Could that carry over to other software markets (maybe? idk?).  Again both these verticals look interesting, but its not the 5x market cap multiplier management wants you to believe when they say the TAM is 5x bigger. 

Both of these add about 12-18b in market cap if they both work.  They should be discounted by time and by probability of success (which I'm not sure how to model).  This is just my first shot and building a model.  I have not looked at the other products in any depth compared to others.  Let me know if there are mistakes.  This is interesting though and if there is proof of strong execution I may take another opportunity to buy in. 

I don't know if you are aware of my other high multiple stocks I like, but I tend to view the other companies as comps not so much by applying comp multiples, but as tools to figure out how the business will progress based on more mature companies.  I tend to like companies where there already is a "blueprint" for success based on other companies in other countries or vertices.  Here though, I don't know what blueprint to evaluate this cross-selling probability of success against, so it's difficult to convince justify risking money.

Looks like you have used reasonable assumptions for the other product opportunities and I absolutely agree they should be discounted for time and probability.  I am probably the wrong person to use as a filter when looking at high growth-high multiple businesses, it's just not my game.  But this stock could potentially be bought rationally from a value investors perspective (before anyone laughs, hear me out) if looked at in a different way.  Instead of thinking about the maximum value in terms of market cap based on size of addressable market (not that there is anything wrong with that process) I'm trying to determine what growth rate and how long it will take for this business to earn annually an amount that co-responds to a 10 multiple on net economic earnings (or basically earn 1/10th of market cap on date of purchase), which equals roughly 700 million USD.  Now if we assume that the incumbent responses are reasonably successful (meaning the growth rate drops to 10-15 percent) then for sure the stock is going to get killed and the multiple will fall to a point where the market gets comfortable with a price that reflects a good return with that growth rate.  And an investor would still do ok over a period 8-10 years with a 15% growth rate assuming they earn say 200 million this year (i know thats a little bit of a stretch if competitive reactions are successful but lets assume it takes a while for reactions to have an effect and assume there are lots of merchants already in the pipeline).  At the other end of spectrum, lets assume that reactions have little effect and this sucker can grow at say an average of 50% for a few years and then settle down to that 10-15% range, this would be a fantastic investment and at this point it doesnt look too unlikely imo and is not that aggressive based on all available information now.  Obviously there are many more potential outcomes and you need lots of good performance from this business to justify today's price but thats the way I think about it and I might be dead wrong in thinking about it like that.  And like I said, I would much rather buy a proven model with competitive advantage in a stable industry at a 10 multiple (surprisingly I have found quite a few of these in last few years despite the low interest rates and high multiple of the S&P) but maybe I should throw in one of these high multiple stocks occasionally.  Thanks for all your input Cam, much appreciated.
Title: Re: STNE - StoneCo Ltd
Post by: Spekulatius on April 23, 2019, 03:43:42 AM
Unless I am mistaken, STNE and PAGS process about the same payment volume (~25B real), yet STNE’s revenue is less than half PAGS (~530M vs 1267M for PAGS), somit seems to me that STNE is the low price/low cost provider here by a significant margin. Presumably, PAGS is cheaper than the incumbents.

The low transaction cost is one reason why STNE has a much higher proportion of interest income. Given that, it looks like the incumbents will have a hard time fighting back.
Title: Re: STNE - StoneCo Ltd
Post by: Jerry Capital on April 23, 2019, 05:43:00 AM
Surprised with no discussion of $MELI which is much better positioned than $PAGS or $STNE to benefit from digital payments. $STNE and $PAGS sell a commodity. Legacy merchant acquirers will keep a lid on pricing, just like we saw with Rede.

With a clear blueprint for success (Alipay PayPal), a first and best customer MercadoLibre Marketplace, Mercado Pago is the much better competitively positioned.
Title: Re: STNE - StoneCo Ltd
Post by: walkie518 on April 23, 2019, 06:59:25 AM
my dollar to your doughnuts, Berkshire invested due to its relationship w/3G as a co-investor

Arpex Capital was founded by Andre Street and Lehman from 3G... Roberto Motta (3G) is on the board of StoneCo as is Carl Pascarella (TPG)

I can't weigh one way or another if this is a good investment for the public, but it's likely a score for 3G, Berkshire, and TPG
Title: Re: STNE - StoneCo Ltd
Post by: cameronfen on April 23, 2019, 07:21:16 AM
Unless I am mistaken, STNE and PAGS process about the same payment volume (~25B real), yet STNE’s revenue is less than half PAGS (~530M vs 1267M for PAGS), somit seems to me that STNE is the low price/low cost provider here by a significant margin. Presumably, PAGS is cheaper than the incumbents.

The low transaction cost is one reason why STNE has a much higher proportion of interest income. Given that, it looks like the incumbents will have a hard time fighting back.

So STNE and PAGS have take rates that are similar to Cielo.  Cielo is at 2% and STNE is at 1.88% take rate and PAGS is similar to STNE but didn't look up.  I think Vince is right that although there main attraction is services rather than cost.  Think square with the ui easy integration with other payments, data logging and analytics (I dont know if SQ does these things).  IMO I think likely the main advantage these guys have over Cielo is that its built on software.  Any update or integration just requires updating some code.  If you think of the old fashion cash registers and credit card terminals, it's basically a hardware first philosophy.  In order to custom integrate it or even update you have to by a new machine.  Obviously people are changing including Cielo. 

As far as @jerrycap's comment, I will look more closely at MELI.  I looked at them and was a little unconfortable by the valuation a while back.  I'll look again.  It sounds like you are aware but MELI's payment platform is more akin to alipay as opposed to square or STNE.  Margins and take rate are much lower for this kind of payment but network effects are much stronger as it's basically a credit card substitute.  If Alipay is worth 100b then Meli payments at scale could be worth maybe 20-30b based on a population ratio, but it's not even close to as dominant.  It could be worth significantly more though if they are able to adopt take rates similar to PayPal (but again that's almost a hybrid model between alipay and sq).