STNE Stock Is a Sinking Stone, StoneCo Is Drowning in Risk

Much like its namesake, StoneCo (NASDAQ:STNE) stock had been dropping like a rock. Even before the major sell-off in tech, STNE stock had been losing value for its investors. There was a ton of hype around the stock for a while with Cathy Woods and Warren Buffett being key investors in the company.

STNE stock had been a disappointment though despite the initial promise. It basically highlights the pitfalls in investing in companies focused on emerging markets.

Volatility abounds for STNE stock. Internal and external factors are dragging this rock down.

Let’s dig into some of these factors.

Trouble inside StoneCo?

In late December, there had been a rumor that StoneCo had hired JPMorgan Chase (NYSE:JPM) to assess its strategic alternatives. This news was first reported by a financial blog called “Brazil Journal.” The rumors had fueled speculations that the company was either going private or shopping around for potential buyers.

At that the time of the rumor STNE stock had jumped nearly 17% — and a bit more for the Brazil-traded share receipts. No doubt day traders were extremely grateful for the volatility as they pocketed easy returns. Eventually, the company released a statement on the matter. A press officer told Reuters via telephone that “the information is not true.”

A buy-out would have been disastrous for long-term shareholders of STNE stock. It had been a painful 2021 for STNE investors. The stock started the year with a bang reaching a high of around $93 in February. After that STNE stock shifted momentum and had gone on a major downtrend. Ultimately losing close to 86% of its total value by the end of the year.

Typically during buyouts, investors get a 20 – 30% premium over its current share price. Typically this is fantastic news. However not when the stock is trading at such a depressed valuation. A measly 20 – 30% from these levels would do nothing to make whole the people who bought the stock earlier in the year.

So why did I bring up a rumor from a month ago? It’s because I have always believed in the adage: “where there’s smoke, there’s fire.”

Despite the denial, I believe StoneCo might not be in good shape. There is evidence to suggest that the company would not return to its massive growth trajectory.

Brazil’s Economy Is in Trouble

The macroeconomic conditions in StoneCo’s main market is proving to be a major drag on the company. Recall that the company’s main business is its payment processing and financing activities. The company specifically targets small and medium businesses which are disproportionately hurt during an economic downturn.

The Brazilian economy just fell into a recession after months of lackluster performance. Gross domestic product was -0.1% in the third quarter of 2021. This was a slight improvement from 2021’s second quarter performance of -0.4%. Like most economies of the world, Brazilian GDP growth was hampered by the effects of the coronavirus pandemic.

However, there are some negative aspects that are unique to the country. Extreme weather conditions in 2021 had severely damaged the country’s agricultural output. There is political unrest as the country’s right-leaning president is facing defeat in the election. Finally, the country is battling the double scourge of high-interest rates and inflation.

Your Takeaway for STNE Stock

I don’t know if the $13 – $14 range is the bottom for STNE stock. The risk in investing in the company at these levels is not worth it in my opinion.

A prolonged recession would be very bad for investors in STNE stock. While the company had been profitable in the past, its heavy reliance on the Brazilian economy will surely hinder its performance.

It’s because of this risk that STNE stock had been downgraded by numerous financial institutions. The latest was HSBC Securities which downgraded the stock to a sell with a price target of $16.

I would stay away from STNE stock.

On the date of publication, Joseph Nograles did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Joseph Nograles is a part-time freelance copywriter focused on the financial industry. He has worked in a wide variety of industries from tech to consulting with one of the “big four.” He has always enjoyed analyzing businesses and has been a CFA charterholder for nearly a decade now.

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