StoneCo Fourth Quarter 2018 Earnings Pt. 1

Giving credit where credit is due

I’m a very happy shareholder of StoneCo and first discovered the company through two resources I respect greatly; The Motley Fool and fellow investor Puru Saxena

Background

I currently own 300 shares with an average purchase price of $37.09 for a total position size of $12,900 which makes StoneCo (NASDAQ: STNE) roughly 3% of my portfolio.

After this strong earnings report, I intend to add to this position over the next couple months. I’ll likely add enough to double the position to around 6% of my portfolio, then let the position decide it’s own fate in terms of portfolio size.

As I’ll cover below, this company has all of the components of a very successful investment opportunity, but due to the inherent risks of operating in Brazil, I aim to keep it under 8% of my total portfolio.

The Results

• Total revenue and income increased 113.7% year over year

• Adjusted net income increased 646.3% year over year

• Adjusted Net Margin improved 21% year over year to 29.5%

• 4Q18 Net income was R$127.1 million compared to a 4Q17 Net loss of R$14.3 million

• Net Margin was 24%, up 29.8% from 4Q17

• Active clients increased by 136.7 thousand during fiscal 2018. Up 104.1% compared to fiscal 2017

• 4Q18 operating costs and expenses were 44.1% of total revenue compared to 68.5% during 4Q17

As indicated by the numbers above, this was a very strong quarter. The three most important numbers for me personally are revenue growth, customer growth, and operating costs. The growth numbers are truly impressive for a company this size and the fact that they are reducing operating expenses as a percent of revenue while growing this fast is a very good sign. I’ll monitor these three metrics very closely moving forward.

My investment thesis

I try to stay away from calling international companies “the blank of Brazil” because every company is different, but it can be a good way to think about the general potential of some companies….so I’m going to do it. StoneCo resembles Square. The premise is providing businesses with reliable and easy to use solutions to get their businesses up and running.

If they’re able to earn their customers trust, this provides a great foundation to continue to innovate, offer additional services or products, and grow within their current customer base and into new customer accounts.

StoneCo appears to be following this model and executing well. The slide above is from their earnings report and gives an idea of future growth potential. I’ve got to go to my real job now, but in Part 2, I’ll cover the Q&A session of the conference call and dig deeper into these future opportunities.