Shares of Brazilian payment processor StoneCo were skyrocketing Friday after Citigroup upgraded the stock, citing an attractive valuation and the company’s strong outlook for the first quarter.
“We think valuation looks attractive, as we believe positive trends for the business such as take rate expansion and strong client additions indicate stronger short-term results than market expected, which was corroborated by the guidance for 1Q22 and positive message for 2022,” Gusan wrote in a research note on Friday.
StoneCo (ticker: STNE) said it expects total revenue and income to grow between 113% and 119% year over year during the first quarter of 2022, ranging between1.85 billion Brazilian reals ($366.4 million) and 1.9 billion reals ($376.3 million). Analysts polled by FactSet were expecting first-quarter sales to clock in at $344.5 million.
StoneCo also said it was working to improve margins throughout 2022. The company has worked on repricing its software offerings, and said it was becoming more efficient with expense management as segments mature.
Berkshire Hathaway owns about 4% of StoneCo, according to FactSet. Cathie Wood’s Ark Invest owns a 1% stake.
The stock has been battered over the last 12 months, losing about 80% amid a selloff of global fintech stocks and disappointing performance that impacted the company’s profitability, Gusan said.
“We lost some focus and execution precision, and as a result our performance suffered, and our profitability declined,” said CEO Thiago Piau. “2021 was not our best year. Period.”
Even so, the company ended the year on a high note, wrote Susquehanna analyst James Friedman. Revenue increased by 87% year over year to 1.87 billion reals ($369.3 million), which Friedman said “reflects improved execution not contemplated in the depressed share price.” The figure beat consensus estimates for $339 million. Earnings per share were 3 cents, in line with expectations.
Friedman also was encouraged by the increasing percentage of recently acquired Linx software payments converting to consolidated revenue for StoneCo.
Friedman maintained a Positive rating and $28 price target on the stock, while raising estimates for 2023.
“We maintain the multiple based on the potential for margin expansion after rate hikes stop and Linx has been fully integrated,” he wrote in a research note on Friday.
Citi’s Gusan said the results reflected marginal improvement amid a challenging scenario, but believes “there are signs of a slightly better future.”
Evercore ISI analyst Sheriq Sumar was more cautious, maintaining a Hold rating and $14 price target. Although revenue outperformed estimates, earnings per share fell short of his forecasts, he wrote in a research note to investors. He believes the company’s rate hikes could slow the pace of net additions in the first quarter, but it could improve profitability.