We have built a material exposure to Brazilian Fintech names over recent months, considering that Brazil was likely to accelerate its digital shift as it was and still is one of the most severely pandemic-hit countries.
The bet is paying off as confirmed last night by the impressive Q2 metrics reported by StoneCo, which offers electronic payments processing and various other digital financial services and which is now our portfolio’s fourth largest position.
With 28% payment volume growth in Q2 and a 29.9% pre-tax margin (vs. guidance of 20-24%), the company well exceeded expectations. More importantly, volume growth accelerated to 47% in June and 129% in July, clearly suggesting that adoption of electronic payments (cards, mobile, online) at the expense of cash is rocketing in Brazil and will position StoneCo and its peers for growth rates above pre-Covid levels (volume growth was « only » 51% in Q4) in coming quarters.
On top of this highly supportive environment, StoneCo announced the acquisition for slightly more than USD1bn of Brazil-based Linx, a retail management and e-commerce software vendor. While the transaction is unlikely to be a game-changer for StoneCo financially speaking in the short term, the long-term implications and synergies could be significant.
If Linx’s 70,000 retail clients (compared to more than 500K for StoneCo) can arguably be a new source of revenue for StoneCo’s core business, the main highlight from this M&A deal in our view is StoneCo’s new ability to offer physical and online merchants, on top of its payment and lending capabilities, a full range of software products and services encompassing marketing, CRM, ERP and e-commerce solutions.
In other words, it seems like StoneCo is gradually evolving towards a Shopify-like business model, one that will let its retail clients fully manage their operations and potentially multi-channel businesses (physical + online) from the StoneCo platform. Not only will this allow StoneCo’s service offering to be more attractive and competitive, it will also help the company fight pricing pressures and the risk of commoditization in its core payment business.
US companies such as Square are also heading in that direction. But StoneCo is now at least on par, not to say one step ahead in Brazil.