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Why Warren Buffett-Backed StoneCo Is Climbing After Earnings

Danny Vena, The Motley Fool

Financial technology and Latin America are two of the hottest growth areas around, and StoneCo (NASDAQ: STNE) sits at the intersection of the two. The Brazilian fintech company is backed by none other than Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) and its legendary CEO, Warren Buffett.

StoneCo generated better-than-expected results for its third outing since its public debut, after ending last year on a high note. For the first quarter, the company reported revenue of 536 million Brazilian reals (about $134.1 million), up 86% year over year. This topped the $132.45 million expected by analysts and the high end of management's guidance. Adjusted net income of 186.3 million reals (about $46.6 million) increased 603% year over year, resulting in earnings per diluted share of 0.63 reals ($0.16), in line with expectations, and far better than the earnings per share of 0.11 reals ($0.03) in the prior-year quarter. 

In the wake of the better-than-expected results, StoneCo stock climbed 6% in after-hours trading on Monday.

Warren Buffett smiling.

Warren Buffet. Image source: The Motley Fool.

Improvement in other metrics

It wasn't just the financial metrics that showed improvement, as StoneCo delivered on a variety of operating metrics as well. Total payment volume (TPV) -- the total amount of payments processed on behalf of merchants -- grew to 26.5 billion reals ($6.63 billion), up 60% year over year. The number of active clients increased to 309,700, up 93% compared to the prior-year quarter. The take rate -- the percentage of every dollar the company keeps from the payment transactions it processes -- grew to 1.86% in the fourth quarter, up from 1.69% in the prior-year quarter, an improvement of 17 basis points year over year.

From a financial standpoint, StoneCo grew each of the company's revenue segments. Transaction activity grew to 168.8 million reals (about $42 million), up 87% year over year, the result of increased TPV as well as client mix. Subscription services and equipment rental of 71.2 million reals ($17.8 million) increased 85% compared with the prior-year quarter, mainly attributable to the increase in small- and medium-sized business (SMB) active clients.

Financial income of 251.4 million reals ($62.9 million) climbed 68% year over year, primarily the result of the increase in TPV. Other financial income of 44.4 million reals ($11.1 million) soared 354% from the prior-year quarter, the result of the interest income from the IPO proceeds and StoneCo's cash balance and short-term investments.

At the same time, the company generated strong operating leverage as the business continues to scale. Costs as a percentage of total net revenue were 39.7%, down from 58.1% in the prior-year quarter. This resulted in net margins that improved to 33%, up nearly four times from the 8.5% it generated in the prior-year quarter.

The increasing capabilities of StoneCo's platform continues to attract customers to its subscription model. Currently, more than 32,000 clients use at least one of the company's software solutions.

Full disclosure

While Berkshire Hathaway owns a sizable 11% stake in StoneCo, it was actually Todd Combs, one of Buffett's top lieutenants, that made the purchase -- but he does so with the Oracle of Omaha's blessing.

StoneCo stock has struggled in recent months on fears that large Brazilian bank Itau Unibanco Holding said it will shorten the holding period before merchants gain access to their payment proceeds. While that certainly bears watching, StoneCo has a host of tools to attract small businesses and it should be able to compete with its larger rival just fine.

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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.