Stone fights market distrust after 80% share tumble

Amid difficulties above those initially anticipated to explore new growth fronts in the credit area, the payment machine company Stone saw its shares undergo a sharp repricing during the past year.

After reaching its all-time high of US$ 94.09 (R$ 517.98) in mid-February 2021, the shares of the company founded in 2012 by André Street and Eduardo Pontes have plummeted since then.

As of December 31, shares on the US Nasdaq Stock Exchange, where the company went public (IPO) in 2018, were trading at US$16.86 (R$92.81), a drop of 82.1%.

Among the main shares of means of payment companies traded on the United States Stock Exchanges, Stone was the one that suffered the biggest devaluation in the year-to-date closed 2021, of about 79.9%. Prominent names within the niche on a global scale also closed last year with significant losses, but to a lesser extent. PayPal shares, for example, ended the period with losses of around 19.5%, while Global Payments shares dropped 37.2%.

Aside from the challenging Brazilian macroeconomic environment for small and medium-sized companies in the consumer and retail sector, Stone’s target audience, investor confidence was seriously shaken after the company reported credit origination problems in the second quarter of last year, which even led to the suspension of the offer at the end of June.

“One of the main reasons for the good performance of Stone’s shares in 2020 was the market’s belief that the company was in fact managing to grow its credit product at a good speed. And, in the first half of last year, we had some signs that this front was not developing in the way we imagined”, says Marco Calvi, an analyst at Itaú BBA.

High levels of delinquency experienced in the segment of small and medium-sized companies, in a year in which the economy did not gain traction as expected by specialists, as well as operational difficulties to make the necessary adjustments to the regulation and the market receivables registration platforms, were identified by the company among the main causes to explain the performance below expectations.

“All the intelligence behind the credit model was perhaps at a stage below what the market understood it to be at the beginning of 2021”, adds the analyst at Itaú BBA.

“The second wave of the pandemic came, Stone may have been more aggressive than it should have been in the credit operation, and lost some of the market’s confidence for not having been 100% transparent in reporting the problems that were occurring”, says Lucas Ribeiro , equity analyst at asset manager Kínitro Capital.

Of Stone’s loan portfolio of around R$1.99 billion in June last year, approximately 35%, or something like R$700 million, was concentrated in customers who were unable to repay the principal for 60 days.

“Our credit business is still at an early stage and we have made some execution errors, mainly without foreseeing how the malfunction of the records system [de recebíveis] could harm the business,” the company said in the earnings report for the second quarter of 2021.

The company acknowledged at the time that, as it is still at an early stage in its credit granting process, this is work that needs to undergo a series of improvements.

But he also said that the malfunctioning of the marketplace platforms played a major role in the results, by allowing traders to shift transactions to other acquiring services that, in effect, circumvented collateral guarantees that had been granted to Stone.

“We have experienced an impressive amount of learning that we will use as fuel to drive the construction of what we envision as a much better credit solution to serve retailers.”

With the company in the process of reformulating the credit area under the suspicious eyes of the market, the broader macroeconomic environment brought additional difficulties to the business.

In view of the very rapid rise in the basic interest rate, the Selic, which went from the historic low of 2% per year in March 2021 to 9.25% in December, the company had difficulties in fully transferring the intrinsic cost increase. financial support to retail customers.

“The interest rate went up very sharply, and it is natural that the rate charged from shopkeepers also started to rise. But as the market is very competitive and with the economy growing little, we saw acquiring companies holding prices down so as not to pass on all the cost increase and run the risk of losing customers”, says Ribeiro, from Kínitro.

“Financial expenses resulting from the increase in the Selic rate should continue to be pressured, increasing quarter after quarter in the next balance sheets”, says Calvi, from Itaú BBA.

Even after all the devaluation already experienced by Stone’s shares, for 2022, analysts estimate that the company will need to prove itself in order to attract new interested parties to the role.

“Cielo is proof that a company in a bad dynamic that cannot overcome the problems can get cheaper and cheaper”, says Ribeiro.

Even because, he adds, with the signals from the Federal Reserve (US central bank) about the beginning of the monetary tightening cycle in the US economy, shares of technology companies in general have been looked at with a little greater dose of caution on the part of investors.

The sector has suffered in different countries, especially with high inflation, which forces central banks to signal the beginning of tightening fiscal and monetary conditions. The high competition environment provided by American big techs and large retail chains has also penalized technology companies that are still in the process of consolidating in the market.

The increase in the Chinese government’s regulation of technology companies in the country has also contributed to clouding the assessment of experts when it comes to analyzes of this segment at an international level.

In Brazil, the increase in interest already in progress and its consequent impact on the expenses of commerce and services companies, which use the system massively, as well as the advancement of other payment alternatives, such as Pix, and the of new companies in this sector, such as Magazine Luiza, which launched MagaluPay.

In this sense, competitors in the sector have also moved to face headwinds. PagSeguro PagBank, belonging to Grupo UOL —which has a minority and indirect stake in Grupo Folha, which publishes the leaf— announced on January 10 a reformulation in its administrative structure, with the creation of the executive committee of the board of directors.

The new committee is formed by Luiz Frias (chairman of the board of directors and publisher of leaf), Eduardo Alcaro (vice-chairman of the board) and Ricardo Dutra (co-executive chairman). According to the company, the committee will act to facilitate the communication of senior management with strategic matters related to the operation. PagSeguro shares fell by 53.9% in 2021.

Among the main actions of means of payment companies traded on the American market, Brazilian companies, even due to the local macroeconomic environment that surrounds them, ended up being more punished compared to peers in the sector on a global scale.

In addition, at the end of last year, during the IPO process on the New York Stock Exchange (NYSE), in the United States, fintech Nubank was also affected by the reduction in investor appetite for technology businesses. Especially in the case of capital intensive ones, but with promising gains to be captured even further down the road.

“There are still many questions to be answered regarding Stone, mainly related to the company’s ability to execute a rate repricing policy and to overhaul its credit product. We assess that Stone is facing a perfect storm. This involves the associated challenges. to the incorporation of Linx [adquirida em outubro de 2020], pressure on the profitability of payment methods products and the ongoing challenge of completely reformulating the credit product”, says a December report from Itaú BBA.

At the time of publication of the report, Stone’s stock recommendation was downgraded from “outperform”. [desempenho acima da média de mercado] para “market perform” [em linha com o mercado]. The projected target price for the shares at the end of 2022 fell from US$ 65 to US$ 18, a drop of over 70%.

“We believe that 2022 will be challenging for Stone, as the company has many points to focus on, such as the “turnaround” [reestruturação] of the credit business (which could restore the market’s confidence in the management), price increases for merchants to at least partially offset the funding costs, and additional investments in the integration with Linx”, endorse the UBS BB analysts, who earlier this year revised the price target for Stone’s shares from $47 to $21, down 55%.

Sought, Stone declined to comment.