StoneCo – Why Had Its Share Price Crashed >90% & What’s Next?
- Rupam Deb
- Mar 24, 2022
- 5 min read
Overview
If you have been following StoneCo, you would know that its share price had crashed by a whopping >90%, from its peak of ~$92 in February 2021 to ~$8 on 15 March 2022, before recovering by ~70% to ~$14 on 21 March 2022, after its 2021 earnings release a few days earlier.
Two main reasons leading to such significant drop in StoneCo’s share price over the past year are the market’s concerns over:
StoneCo’s credit business, where due to technical issues with the central receivables registry system implemented by the Brazilian government and credit deterioration of StoneCo’s clients amid the Covid-19 pandemic, StoneCo had to write off a large portion of its credit loans and temporarily stopped the credit business and not disburse any new loans; and
the rising interest rate in Brazil (with the average CDI (i.e. the Brazilian interbank deposit rate) shooting up from 2.2% in March 2021 to 9.2% in January 2022), where it’s unclear whether StoneCo would be able to pass on those increased funding costs to its customers for the prepayment and credit businesses, particularly when StoneCo had chosen not to do so largely in 2021 to continue to attract and retain its customers, thereby getting a hit on its profitability.
With more clarity now on how these issues have evolved in 2021, in this article, we discuss:
the overall situation of the credit business in 2021, and StoneCo’s plans for that business in 2022;
the impact of the rising interest rates on StoneCo’s profitability in 2021, and StoneCo’s repricing initiatives in late 2021 and the early results;
the operational performance of StoneCo in 2021, taking a step back to look at the overall business and its longer term prospects; and
StoneCo’s valuation, to see if the share price decline in the past year is reasonable, and whether it is currently undervalued.
1. Credit business
Let’s start with what the CEO, Thiago Piau, had to say.
“2021 was an unsatisfying year for Stone. We executed well in some areas but faced challenges in others. We believe our market opportunity is huge and merits an aggressive approach, but we tried to do too much last year and did not execute as well as we would have liked… In credit, we ramped up our offering quickly, but did not manage it well. Our execution challenges were exacerbated by the problems of the national registry system, which we did not expect and therefore were not well-prepared for. As you know, in mid-2021 we paused our credit operations.”
So StoneCo did have some screw ups on its credit business, with the management acknowledging so publicly and honestly, and outlining their plans to relaunch the working capital offering and the credit offering gradually with more caution this time before scaling it up.
In terms of the impact in 2021, in mid 2021, when StoneCo realised the credit issues, it stopped disbursing new credit loans. As of end 2021, as some of the loans get repaid, the legacy credit portfolio stood at BRL 1.20 billion, of which BRL 0.76 billion had been provisioned for bad debt, with the remaining BRL 0.45 billion expected to be collected, mainly over 2022.
Overall, since the inception of the credit product 2.5 years ago, StoneCo has disbursed BRL 3.4 billion to its clients. Of that, it has already received back most of the principal (BRL 3.2 billion)
And it expects to achieve accumulated cash flow breakeven in the coming months, eventually receiving more than what it disbursed. Although overall this business has been net cash flow positive for StoneCo in terms of the absolute cash inflow and outflow amounts, because of the timing of the cash flows where StoneCo had to provide capital first, which it mainly borrowed from other parties by paying interest expenses that rose over the year (due to the rising interest rates), it is unclear if the business actually had a positive internal rate of return (IRR), which the management did not comment on.
Nevertheless, the management have admitted their mistake and tried to control the impact (by stopping the business temporarily), and are now using their learnings to relaunch the credit product since mid 2021, by implementing five major fixes in the credit product and operations:
Revamped product to simplify user experience based on monthly installments paid through automatic retention using the Stone account’s cash-in;
Added personal guarantees to enhance protection against bad borrowers;
Implemented a new origination process based on enhanced data ingestion from multiple sources, including from its Hub operations;
Rebuilt systems to enhance client communication, renegotiation analysis and agreements (which were lacking in 2021), execution of warranties and better integration with collection partners, to optimise recovery rates; and
Implemented an improved Risk Monitoring System to effectively resume disbursements with a more robust risk management.
Going forward, in 2022, StoneCo is planning to relaunch its product slowly, testing it in the second and third quarters of 2022, and also launching new business credit card and overdraft products in the second half of 2022. After its lessons in 2021, it is now planning to take it slow and conservatively, by initially giving credit to the best clients, and using its own capital first during the testing phase before using external capital to scale up, while compounding the knowledge and management capabilities.
Therefore, there might not be much earning contributions from the credit business in 2022, and we would have to continue to monitor if StoneCo can build and scale up this business in a profitable manner sustainably, particularly with the central registry system still not solved fully yet.
2. Impact of rising interest rates & repricing initiatives
As shown in the chart below, the rise of interest rates in Brazil (the CDI line) has been tremendous, more than quadrupling in less than a year, from 2.2% in March 2021 to 9.2% in January 2022 (which is still rising).
However, as seen above, StoneCo’s take rate for MSMB (micro-merchants & SMBs) excluding the credit offerings has been going the other direction, dropping from 1.95% in March 2021 to 1.61% in October 2021.
As the interest rates rose, StoneCo had been slow to reprice its pricing for customers for its prepayment business…
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