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Why This Warren Buffett-Backed Fintech Company Soared on Earnings

Danny Vena, The Motley Fool

Financial technology and e-commerce are two of the biggest megatrends that continue to gain traction in 2019. One of the more closely watched new players in the field is StoneCo (NASDAQ: STNE), the Brazilian fintech company backed by famed Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) CEO Warren Buffett. StoneCo only went public in October 2018, and after falling more than 40% in the months following its IPO, the stock has come roaring back, gaining nearly 130% from its bottom in late December.

StoneCo released only its second set of financial results since its public debut. For the fourth quarter, the company reported revenue of 529 million Brazilian reals (about $139.5 million), up 114% year over year. This easily surpassed the $123.66 million expected by analysts. Adjusted net income of 155.9 million reals (about $41.1 million) increased 646% year over year, resulting in earnings per diluted share of 0.51 reals ($0.13), in line with expectations, and far better than the loss per share of 0.06 reals ($0.02) in the prior-year quarter. 

In the wake of these results, StoneCo's stock soared 20% in after-hours trading.

Warren Buffett at an investor event.

Image source: The Motley Fool.

Improving metrics

StoneCo reported significant improvement in each of the key operating metrics that it provides. Total payment volume (TPV) -- the total amount of payments processed on behalf of customers -- grew to 26.6 billion reals ($7 billion), up 74% year over year. The number of active clients grew to 268,000, more than double the 131,000 from the prior-year quarter. The take rate -- the percentage of every dollar that StoneCo keeps from each payment transaction it processes -- grew to 1.88% in the fourth quarter, up from 1.58% in the prior-year quarter, an improvement of 30 basis points.

The company achieved significant improvement in each of StoneCo's revenue segments. Transaction activity grew to 174.4 million reals (about $46 million), up 109% year over year, the result of increased TPV. Subscription services and equipment rental of 69.5 million reals ($18.3 million) increased 138% compared to the prior-year quarter, mainly attributable to the increase in small- and medium-sized business (SMB) active clients. Financial income of 255.8 million reals ($67.5 million) climbed 98% year over year, primarily attributable to the increase in the number of clients and the increase in TPV. Other financial income of 29.6 million reals ($7.8 million) soared 372% compared to the prior-year quarter, the result of the interest income from the IPO proceeds on StoneCo's cash balance and short-term investments.

At the same time, costs as a percentage of total net revenue was 44.1%, down from 68.5% in the prior-year quarter, as the company achieved strong operating leverage as it continues to scale the business. This resulted in net margins that improved to 24%, up from negative margins in the prior-year quarter.

StoneCo continues to focus on adding capabilities to its platform, and its software solutions are showing traction and increasing penetration with customers adopting the subscription model. Currently, 14,000 clients use at least one type of the company's software, and a much larger number use the client portal dashboard and mobile app account, though the company didn't provide specific figures.

A person holding a smartphone with dollar signs appearing above the phone.

Image source: Getty Images.

It actually wasn't Buffett

Berkshire Hathaway invested $340 million to acquire 14,166,748 Class A shares of StoneCo in conjunction with its IPO, at about $24 per share. A report in The Wall Street Journal revealed that it wasn't actually Buffett, but Todd Combs -- one of Buffett's portfolio managers -- who was responsible for selecting the company.

StoneCo said in its registration statement that it's already the fourth-largest payment processor in Brazil in terms of total payment volume, an impressive feat for a company of its size. It's still too early to tell whether this will ultimately be a worthwhile investment, but StoneCo is certainly off to an impressive start.

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Danny Vena has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.