For those who are interested, refer here.

Hi all, my name is Philip. Today I would like to explain on my views and strategy of evaluating a company, especially an IPO. This IPO is particularly interesting, as it is backed by both Alibaba(ant financial) and berkshire hathaway. So the big question is, what do they see in Stoneco? And how you should use business sense to understand your bursa stocks?

 https://www.sec.gov/Archives/edgar/data/1745431/000119312518309043/d580263d424b4.htm <<- for the SEC prospectus

https://www.stone.com.br/  <<--- the sales website

Step 1. Understand the Business

Now, what is so special about stoneco products? Firstly, you have to understand where stoneco lies in the scheme of things. Stoneco basically does simplified payment, monitoring and tracking of of your business. They do very quick and painless of multiple sources of transactions (vouchers, web payments, credit cards, bank transfers) into a cloud based POS system that you can easily track, automate payments and transact in one single application via phone or computer. You no longer need to have multiple tools that clog up your business (a standalone POS system, a payment gateway for web payments, and a merchant id for credit card local payment, and an invoicing and taxing system), saving you much time and money, especially for small to medium business with minimum funds to run a business. All this for a simple price of RM150 per month, with additional fractional fees per transaction. It becomes a godsend for people running simple businesses like hairdressers, stall owners, small one man show contractors who can have the benefit of running a credit card payment system, pos system, invoicing system all in one simple product,.

Meet the S920N, the simple gateway that is cloudbased, and is applinked to your smartphone, allowing you to do different formats of payment easily.

Now, to understand the VALUE PROPOSITION of stoneco, you must first understand your basic financial mechanisms in terms of credit card payment systems.

The order of banking is such:

FINANCIAL INSTITUTION ( or banks that hold deposits and arrange loans and payments with central bank) In malaysia these are big banks like PBB and Maybank that only deal with large or trustworthy clients. If any of you have tried to do a small business and found out how difficult it is to arrange for a credit card payment solution, then you know what I am talking about.

MERCHANT ACQUIRER (or basically a merchant bank that has a contract with the financial institution, basically the front end of a bank or saleseman) These are small volume entites who would find those customers traditionally ignored by big banks and offer them processing capability.

MERCHANT PROCESSOR (or basically the back end that goes around and does the cool website and payments) These would be your processors like boost, alipay and apple pay etc, which conduct within a specific transaction method.

Why is Stoneco so interesting? It started out as a merchant processor, selling its receivables to banks to raise money, and providing value added services of POS and credit card processing to SMB or small medium businesses. Basically this is a boon for the 8.8 million small businesses in Brazil, all of which are using a cash and carry business model. With the arrival of Stoneco and its listing to MERCHANT ACQUIRER status in 2017, it has allowed them to give these business the ability to deal with credit cards and online payments easily and flexibly. 

You can order your stone machine online, it has a strong battery with 3G signal and get it delivered to you. If you have a smartphone, you can basically run your business from the street anywhere and have instant credibility to customers that wish to pay via credit card, hiper and other payment methods. all the payment notifications and approvals are linked with your phone or web, making transactions extra safe and secure.

With its cloud based architecture, you do not need multiple bank branches and clunky systems, everything can be done via the green angels consultants, email and telephone without stepping into a single bank branch. And best of all, with their upgrade into a full merchant acquirer, they can create for you an online banking account that is safe, secure and you can withdraw your money from any ATM in brazil.

Sounds amazing? it is. Stoneco is now the 4th largest in terms of volume transacted in brazil, and it is growing at a huge pace.

Step 2. Look at the financials and the asking price

Recently Stoneco IPO was fully oversubsribed, it raised around 1.1 billion usd dollars and is listed in NASDAQ at 22 times trailing earnings.

if you look at its revenue, IN MILLIONS

                                                                   2016                                   2017                              2018(1ST HALF)

 REVENUE                                                   439                                    766                                     635.7

 NET INCOME                                            -122                                    -106                                     87.7

ACTIVE CLIENTS IN THOUS                     81.2                                    131.2                                   200.6

The net income negatives at first glance appears to be worrisome, until you realize that in building a centralized system you have a high capex cost, but for each transactional client gained in the future, your take up cost becomes much lower in the long run.

TERMINAL VALUE OF BUSINESS : As announced in the prospectus, the main focus is to service and gain the business of the 8.8 million SMB's currently being ignored by the large banks today.  if you do a simple estimate, when they hit 8 million active clients, you will be looking at roughly 25 billion in revenue, 3.6 billion in net income. How accurate this will be is a matter of debate, but paying pe22 for a business that has grown by double every year with a vertical intergration, simple business model and a very easily replicable system outside of brazil, gives much hope for the future. And with a 1.1 billion dollar warchest to do accelerated growth and expansion in multiple fronts, we know where the growth will be and where the money will be used.

Step 3. Look at the technicals

There are no technicals other than the fact that the ipo was oversubsribed, it went from 24 to 32 to 17 to 21. Make of that what you will. Personally, my advice is to stick to the next quarterly report to give a head of the earnings and profits of the company, any future headwinds, and if the business story has changed or affected in any way.

Personal disclosure: I have purchased 200K shares in NASDAQ: STNE since 4 january 2019. 

Cheers, 

and hope you learned something

Philip