Warren Buffett’s Berkshire Hathaway (BRK.A) (BRK.B) has several stocks in its portfolio. One high-growth tech stock in the portfolio is StoneCo (STNE). While Buffett hasn’t personally invested in the company, Berkshire Hathaway holds $533 million worth of STNE stock, according to a CNBC report.
The stock is valued at $10.5 billion, which means that Berkshire Hathaway holds a 5.1% stake in the company. We’ll take a look at the company’s stock performance, valuation, growth metrics, and more.
STNE is in the fin-tech space
StoneCo provides cloud-based platforms for e-commerce and mobile channels. The platform helps enterprises increase customer engagement and scale their business in the ever-changing e-commerce segment. STNE has three key verticals and provides solutions for businesses in the restaurant, retail, and beauty segments.
The company also provides solutions to payment service providers. STNE is a Brazil-based company. Notably, the company has been listed on the NASDAQ since October 2018. Analysts expect STNE to increase its sales 52.1% to $610.4 million in 2019 and 37.1% to $836.68 million in 2020. What’s driving the revenue growth?
STNE wants to make the payment solutions lifecycle easier for merchants. The company provided working capital funding for small and medium businesses. In the second quarter, STNE’s active client base rose 79.5% to 360,000. Meanwhile, the company added 50,500 clients in the June quarter.
The company wants to expand beyond payment solutions. In the software vertical, StoneCo’s customer base rose from 32,000 at the end of March to 70,000 at the end of July. STNE has an opportunity to gain traction among existing clients and cross-sell software solutions.
StoneCo wants to enter the micro-merchant space. The company entered into a joint venture Grupo Globo in the June quarter. Grupo Globo is Brazil’s largest media conglomerate. The JV is expected to launch in the fourth quarter.
STNE aims to combine Grupo Globo’s media and marketing knowledge with its own fin-tech capabilities.
Rapidly scaling business
We have seen that StoneCo has increased its customer base at a significant pace over the last year. The increased customer base resulted in 60.6% growth in the total payment volume and 68.6% growth in sales during the June quarter.
The revenue growth helped StoneCo improve its operating leverage. In the second quarter, the company’s net income rose 2.7x. Meanwhile, the net margin rose from 20.5% in the second quarter of 2018 to 33.1% in the second quarter.
STNE stock has risen 31.7% since NASDAQ listing
StoneCo shares have gained close to 32% since its listing on NASDAQ. The stock has gained 83% year-to-date and is valued at 17.3x forward sales. STNE stock is trading at a forward PE ratio of 37x, which might seem expensive at first glance.
However, we have seen the company’s stellar expected revenue growth rate. StoneCo expects the total addressable market to be $20 billion. The company has enough room for top-line expansion. Analysts also expect STNE to improve its earnings 91.9% in 2019 and 43.7% in 2020. Analysts have a 12-month average target price of $35.4 for the stock, which is 6.2% lower than the current price.
However, the stock can zoom ahead if its third-quarter earnings beat the revenue and earnings estimates. In the September quarter, analysts expect StoneCo to post sales of $160.08 million with an EPS of $0.18.
While Berkshire Hathaway has a stake in STNE, the former also ended the third quarter with a record cash balance of $128 billion. The cash balance suggests that Buffett and Berkshire Hathaway think that the current market is overvalued.
The Dow Jones Industrial Index and the S&P 500 touched record-highs today due to renewed trade optimism. However, recession indicators are looming large over global markets. Buffett set aside cash for a rainy day. He will re-enter the market at reasonable valuations.