STNE Stock: StoneCo Has Room to Fall Before it Hits Rock Bottom

Knocked down yet again to around $13 per share, StoneCo Ltd. (NASDAQ:STNE) may again look appealing as a “bottom-fisher’s buy.” After all, following its extended sell off, it is possible that STNE stock has become oversold, right?

Not so fast. Time and time again over the past year, some people have “bought the dip” with this fintech firm. Each time has been a hard lesson in the perils of investing in troubled companies. Admittedly, recent market volatility has played a role in its latest dive. Sentiment has also shifted in the financial technology space. You have likely seen that in the performance of this company’s larger peers.

Still, this is not the main driver. If not volatility or a souring view on fintech, then what has been knocking it lower? It is the same factor behind its prior drops: the poor performance of its operating business. A Brazil-based payment processor, StoneCo’s business has fallen off a cliff for reasons that are largely out of its control.

Tough economic conditions in Brazil have taken a serious toll on its operating performance. These issues will likely carry on in the coming year. With its share price still not yet fully reflecting the extent of the deterioration, the stock has big downside risk with little upside. Avoid it at all costs.

The Market Has Made No Mistake Bidding Down STNE Stock

The market has not always been rational when it comes to StoneCo shares. For instance, back in mid-2020 and early 2021, in a way, investors became irrational about the stock. Except, instead of becoming too pessimistic about it, they became too optimistic.

During this time, shares in U.S.-based fintech companies were taking off, as the pandemic helped to accelerate the digitization of financial services. Viewing STNE stock as a more under-the-radar way to play this trend, the market pounced on it. Basing their investment decision more on hope and hype rather than on fundamentals, they bid it up all the way to $95.12 per share.

But not too long after that, shares came crashing back down. As 2021 played out, the company released quarter-after-quarter of worsening financial results. With this, the market wised up. They have re-priced it accordingly.

Worse yet, they will continue to do so. With no end in sight for its current predicament at around $13 per share, it still hasn’t bottomed out. Don’t count on it holding steady, much less, making even a partial recovery.

StoneCo’s Questionable Comeback Prospects

Now down around 85% off its all-time highs, I can see why some may want to buy STNE stock as a comeback play. In theory, a slight improvement would enable it to move back to higher prices.

But based on the latest economic figures out of its home market, I wouldn’t hold your breath waiting for one. With double-digit inflation, supply chain headwinds, and continued economic challenges stemming from the pandemic, Brazil is on the brink of experiencing another “lost decade.”

Without a broader economic recovery, a StoneCo recovery just isn’t going to happen. Instead, the issues hurting its results will remain. With this, it makes sense that Credit Suisse’s Daniel Federle downgraded shares back in December. In his research note, Federle cited a lack of clear catalysts as a key reason behind his rating change. He also noted rising costs, which points to the company’s profitability dropping again in the coming quarters.

On top of all this, the sell-side analyst touched on the stock’s high valuation. It would be one thing if shares were trading at a low price-to-earnings, or P/E, multiple. But that is not the case here. Instead, despite all the uncertainty, shares trade for around 79.5x earnings. Yes, projections have called for it to see a big earnings increase this year. Then again, as Brazil’s economy is still struggling, analysts have across-the-board cut earnings projections at a rate of 7 downwards revisions to zero upwards revisions.

Bottom Line on STNE Stock

Earning an “F” rating in my Portfolio Grader, in closing I will discuss another factor that may mislead investors into buying this stock. That would be legendary investor Warren Buffett’s past involvement. Yes, Buffett’s firm did invest in StoneCo at the time of its initial public offering (IPO).

But as InvestorPlace’s Stavros Georgiadis put it, the “Oracle of Omaha” made a mistake with this investment. Buffett has yet to bail out of his position. Even so, don’t buy into talk of him possibly doubling-down, or providing the struggling company with an additional infusion. That is simply a case of bullish investors grasping for straws.

As bad economic conditions in Brazil keep on impacting its results, expect the market to carry on sending STNE stock to lower prices. With no need to jump in, taking a hard pass on it is your best move.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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