When billionaire investment guru Warren Buffett speaks, investors listen. So when his multinational conglomerate Berkshire Hathaway announced plans to make a sizable investment in Brazilian fintech company StoneCo Ltd. (STNE), individual and institutional investors alike leaned in for a closer look at this relatively unknown entity. This article explores why StoneCo's business model captured Buffett's attention.
- Warren Buffet's company Berkshire Hathaway announced plans to purchase a large share of a relatively obscure Brazilian fintech company called StoneCo Ltd. in October of 2018.
- Launched by André Street and Eduardo Pontes, StoneCo was the follow-up company to the duo's earlier venture called Braspag.
- After StoneCo's 2018 IPO, share price spiked by 30% in the first two days.
Digital Payments Services in Brazil
According to its prospectus 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 achieved prior success with their online payment technology firm Braspag, in response to changes in the market, the duo shuttered their earlier operation in order to build StoneCo from scratch. In addition to advanced technological capabilities in the electronic payment space, StoneCo stressed the importance of human connection, to ease customer interaction with StoneCo's sales and customer service teams.
Scale, Growth, and Margin
StoneCo launched an IPO in 2018, prior to which time the firm claimed in its SEC filings to have achieved substantial growth, margin expansion, and scale. The company boasted a total revenue and income of $636 million Brazilian Real (nearly $160 million USD) for the first quarter of 2018, as well as a valuation of $6.1 billion, about 22 times the company's revenue for the trailing 12 months. StoneCo also claimed to have captured more than 5.5% of Brazilian market share for Q2 2018, with more than 230,000 clients locked in by Q3 of that year. On the basis of volume, StoneCo is currently Brazil's fourth-largest electronic payment processor.
With such impressive numbers achieved in such a short time, it's no surprise that StoneCo drew the attention of eagle-eyed investors at Berkshire Hathaway, prompting the purchase of more than 14 million shares at the IPO price. But this move nevertheless turned heads, because Berkshire is better known for focusing on blue-chip stocks and predictable, steady companies, including insurance carriers and utility concerns. Buffet's sudden interest in a largely untested fintech company marked a shift in his typical investment approach, especially due to Buffett's notorious distrust for IPOs. Case in point: according to The Wall Street Journal, at Berkshire's 2012 annual meeting, Buffet suggested that "out of thousands and thousands and thousands of businesses in the world, an IPO can't be the most attractive thing, if for no other reason than the fact that sellers have an advantage in deciding when to enter the market."
In any case, at least partly due to Berkshire's investment, StoneCo has quickly risen to a position of prominence since its IPO, with its share price rising by 30% in the first two days of trading, although its price has since fallen, as of this writing.