Why Did Berkshire Hathaway Invest in StoneCo Ltd.?

Why Did Berkshire Hathaway Invest in StoneCo Ltd.?

When billionaire investment guru Warren Buffett acts, other investors pay attention. So when his multinational conglomerate holding company, Berkshire Hathaway, announced plans to make a sizable investment in a Brazilian fintech company called StoneCo Ltd. (STNE) in October 2018, individual and institutional investors alike became curious about this, at the time, relatively unknown company.

When StoneCo was launched in 2012, founders André Street and Eduardo Pontes had already spent over a decade working in the electronic payment and payment processing fields in Brazil.

Although they had achieved success before with their online payment technology firm called Braspag, the pair shuttered this earlier operation in order to build StoneCo from scratch.

The company utilized the most advanced technological capabilities in the electronic payment space. StoneCo also stressed the importance of human connection, calling itself a customer-centered company.

The company is based in Sao Paulo and has approximately 7,200 employees.

Key Takeaways

  • In October 2018, Berkshire Hathaway announced plans to purchase a large share of Brazilian fintech company StoneCo Ltd.
  • StoneCo's founders André Street and Eduardo Pontes had spent over a decade working in the electronic payment and payment processing field in Brazil.
  • They launched StoneCo Ltd. in 2012, shuttering their earlier operation, Braspag.
  • After StoneCo's 2018 initial public offering (IPO), the company's share price spiked by 30% in the first two days.
  • As of 2021, StoneCo had over 1.7 million customers.

Electronic Commerce in Brazil

Cashless transactions are an expanding industry in Brazil, as in other emerging market economies where the majority of transactions are conducted in cash.

StoneCo provides an end-to-end, cloud-based technology platform for merchants to conduct electronic commerce using in-store, online, and mobile channels. The cloud-based platform helps its clients to connect, facilitate transactions, receive payments, and grow their businesses.

The company makes money by charging fees for its services. These include transaction payment processing, prepayment financing, subscription, and equipment rentals. The company's target audience is small- and medium-sized businesses. As of the third quarter of 2019, StoneCo had 428,900 customers. At the end of 2021, it was serving over 1.7 million customers.

Fintech is short for financial technology and is all about the new and innovative technology that has automated the financial services used by businesses and consumers. It emerged as a term in the 21st century.

StoneCo Ltd.'s Growth

StoneCo launched an initial public offering (IPO) in 2018. The company offered 54.9 million shares at a price range of $21 to $23 per share. In its Securities and Exchange Commission (SEC) filing, the firm claimed to have achieved substantial growth, margin expansion, and scale.

The company boasted a total revenue and income of 636 million Brazilian real (approximately $160 million) for the first quarter of 2018, as well as a valuation of $6.1 billion. That was about 22 times the company's revenue for the trailing 12 months.

StoneCo also claimed to have captured more than 5.5% of Brazil's market share for the second quarter of 2018, with more than 230,000 clients locked in by the third quarter of 2018. In the third quarter of 2019, its market share was 8%. As of March 2020, it was the fourth-largest electronic payment processor in the country and had a market capitalization of $7.58 billion.

StoneCo Ltd.'s Investors

With such impressive numbers achieved in such a short period of time, it's no surprise that StoneCo attracted the attention of investors at Berkshire Hathaway. The company purchased more than 14 million shares of StoneCo at the IPO price, making it an 8% owner of the company.

Berkshire Hathaway is known for focusing on blue-chip stocks and predictable, consistent companies. Therefore, its investment in StoneCo attracted a fair amount of attention in the industry.

A new interest in a largely untested fintech company marked a shift in Warren Buffett's typical investment approach. Buffett is also notoriously distrustful of IPOs.

In large part due to Berkshire Hathaway's investment, StoneCo quickly rose to a position of prominence after its IPO. Its share price rose by 30% in the first two days of trading. The company became one of Brazil's unicorns and was also widely considered to be one of the most innovative payment companies in Brazil.

In addition to Berkshire Hathaway, the Chinese fintech giant Ant Financial, controlled by billionaire Jack Ma, also invested sizably in StoneCo. Other shareholders included Brazilian investment firm 3G Capital Inc.’s founders Jorge Paulo Lemann, Marcel Telles, and Carlos Alberto Sicupira.

What Is StoneCo Ltd.'s Market Capitalization?

As of May 2022, StoneCo's market capitalization was $2.87 billion. That's a large drop from its market cap in 2020 of $7.58 billion.

Does Berkshire Hathaway Still Own Shares in StoneCo?

As of Q1 2022, Berkshire Hathaway continues to hold shares of StoneCo stock. Unfortunately, as of May 2022, the stock's price had plummeted over 85% in a year.

Has Warren Buffett Sold Shares of StoneCo Ltd Stock?

Yes. Due to the stock's declining price during 2019, Berkshire Hathaway took some profits by selling 3.5 million shares in Q1 2021. That represented 24% of its stake in StoneCo.

Article Sources
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  1. Sec.gov. "Final Prospectus: StoneCo," Page ix.

  2. Stock Analysis. "StoneCo Ltd."

  3. Sec.gov. "Final Prospectus: StoneCo," Title Page.

  4. Kiplinger. "Warren Buffett Stocks Ranked: The Berkshire Hathaway Portfolio."

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