On Monday, UBS analyst announced an upgrade of StoneCo Ltd. (NASDAQ: STNE) stock from Neutral to Buy, despite reducing the price target from $21.00 to $17.00. The upgrade reflects a positive outlook on the company's fundamentals, which are believed to be bolstered by its banking bundle offerings.
This reassessment comes even as higher interest rates are anticipated to persist, leading to a 5% reduction in earnings estimates for 2024-2028 and a 50 basis points increase in the cost of equity.
StoneCo's recent market performance has been underwhelming, with the stock price falling approximately 30% since the first quarter of 2024 results. This decline is notably steeper than the 6% drop seen in selected global peers during the same timeframe.
The company's current trading levels are at a record low, with a forward consensus price-to-earnings (PE) ratio of 9 times for one year or 8 times for 2025 estimates, compared to a 17 times PE for 2025 among selected global peers.
Despite the price target reduction, UBS sees an attractive entry point for investors given the stock's underperformance. The market appears to be undervaluing StoneCo, pricing in an average net margin of approximately 14% for 2024-2028, whereas UBS's estimates are closer to 18%. Furthermore, the return on equity (ROE), adjusted for goodwill, is projected to reach 19% in 2025.
The analyst's statement underscores the belief in the company's continued improvement and the perceived mismatch between StoneCo's market valuation and its financial prospects. The upgrade to a Buy rating indicates a confidence in the company's ability to navigate the challenging economic environment and deliver value to shareholders.
In other recent news, StoneCo Ltd. has been the subject of various analyst upgrades and downgrades. JPMorgan (NYSE:JPM) upgraded StoneCo from Neutral to Overweight, setting a price target of $20.00 based on the company's strong growth outlook. The financial firm cited an estimated 20% compound annual growth rate for the company's earnings per share from 2023 to 2027.
On the other hand, Morgan Stanley (NYSE:MS) maintained its Equalweight rating on StoneCo with a consistent price target of $16.50, expressing concerns about the intensifying competition within the merchant acquiring space.
StoneCo's recent earnings report showcased significant growth, with a 24% year-over-year increase in Total Payment Volume (TPV) in payments, and a substantial expansion of its active client base in the banking segment. However, the company's revenues and Earnings Before Interest and Taxes (EBIT) fell short of analyst projections for the first quarter of 2024.
In other company news, StoneCo's Founder and Chairman Andre Street will not be running for re-election, introducing an element of uncertainty regarding the company's future governance and strategic direction.
Despite the leadership transition, StoneCo continues to demonstrate its resilience and potential for continued success in the financial technology sector. These are the recent developments in StoneCo's financial landscape.
InvestingPro Insights
The recent UBS upgrade of StoneCo Ltd. (NASDAQ: STNE) to Buy echoes with the company's robust financial performance and strategic positioning in the market. InvestingPro data reinforces this perspective, showing a solid revenue growth of 18.07% over the last twelve months as of Q1 2024, with a notable operating income margin of 46.38%. Additionally, the company's aggressive share buyback program, as highlighted in one of the InvestingPro Tips, signals management's confidence in the company's value. StoneCo's market capitalization currently stands at $3.81 billion USD, with a P/E ratio of 12.13, which is adjusted to 11.98 for the last twelve months as of Q1 2024.
Investors considering StoneCo may find the current stock price volatility, as mentioned in another InvestingPro Tip, to be an important factor in their decision-making process. Analysts predict the company will be profitable this year, and it has been profitable over the last twelve months. Despite not paying dividends, StoneCo's growth trajectory and management's strategic decisions could offer potential for capital appreciation. For those looking to delve deeper into StoneCo's financials and future prospects, InvestingPro provides additional analysis and tips—there are 5 more InvestingPro Tips available for StoneCo at https://www.investing.com/pro/STNE. To access these insights, use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription.
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