Goldman Sachs Upgrades StoneCo Ltd. (STNE) to Neutral

Goldman Sachs analyst Tito Labarta upgraded StoneCo Ltd. (NASDAQ: STNE) from Sell to Neutral with a price target of $11.00 (from $7.50).

The analyst comments "We upgrade Stone to Neutral from Sell, following better than expected 3Q22 results. Our price target rises to $11.0 from $7.5 (6% downside), mainly due to our higher earnings estimates, partly offset by a higher beta of 1.3 vs. 1.2 before, due to increased volatility. Our PT is based on a 3-stage DCF with a 14.5% COE (up from 14.1%, due to the higher beta), second stage growth of 20%, and terminal growth of 6%. The stock is currently trading at 19.6x 2023E P/E, while our PT implies that it should trade at 18.4x. Since we downgraded the stock to Sell on September 6, 2022, the stock is up 41% vs. the Ibovespa up 3% and S&P 500 up 4%. Key upside risks include: 1) Better-than-expected take rates in the pre-payment business, as the company continues to reprice its prepayment offering to clients to offset higher financial expenses, which can generate higher-than-expected financial income; 2) Better-than-expected market share gains with higher volumes and revenues. We think the company offers an attractive value proposition to its merchants through its hubs strategy, which offers a dedicated client service approach to interacting with merchants; 3) Strong execution and potential synergies from the integration with Linx, leading to a stronger value proposition, growth and margins. Indeed, increased software offerings can lead to increased client stickiness and allow them to monetize clients further; 4) Resumption of credit origination can boost take rates driving better-than-expected profitability. The company has access to extensive data from its clients by managing their payment offerings, which it can potentially use to underwrite credit. Key downside risks include: 1) Increased competition pressuring margins, as the competitive environment remains challenging with prepayment spreads remaining relatively stable, despite extensive repricing; 2) Continued pressure on margins from higher interest rates, particularly if interest rates remain higher for longer, given an uncertain macro/political outlook; and 3) Higher expenses than expected as the company invests in the business to look for other avenues of growth and continues to enhance its value proposition"

For an analyst ratings summary and ratings history on StoneCo Ltd. click here. For more ratings news on StoneCo Ltd. click here.

Shares of StoneCo Ltd. closed at $11.68 yesterday.

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