Executive Summary / Key Takeaways

• StoneCo is undergoing a significant strategic transformation, divesting its non-core software assets to sharpen its focus on the high-growth, high-profitability financial services segment for Brazilian micro, small, and medium-sized businesses (MSMBs).
• The company's core financial services business, encompassing payments, banking, and credit, is demonstrating robust growth and enhanced profitability, with Q2 2025 adjusted net income accelerating 27% year-over-year and the Financial Services segment achieving a 30% Return on Equity (ROE).
• Disciplined capital allocation, including substantial share buybacks, is a key pillar of StoneCo's strategy, with over BRL 4 billion unlocked from software sales and a commitment to return BRL 3 billion in excess capital to shareholders.
• Despite a challenging macroeconomic environment and a projected stabilization of MSMB TPV growth at low double-digits, StoneCo's diversified monetization strategies, pricing discipline, and increasing client engagement are expected to drive adjusted gross profit growth above 14.5% and adjusted basic EPS growth of 32% year-over-year in 2025.
• StoneCo maintains a strong competitive position through its unique hybrid distribution model, proprietary technology, and deep understanding of the Brazilian MSMB market, enabling it to differentiate against both digital-first and traditional banking rivals.

The Brazilian Fintech Landscape: StoneCo's Strategic Foundation

StoneCo Ltd., founded in 2012, has established itself as a pivotal financial technology provider in Brazil, primarily serving the vast and underserved micro, small, and medium-sized business (MSMB) segment. The company's overarching strategy centers on empowering these businesses through a comprehensive ecosystem of payments, banking, and credit solutions. This client-centric approach, coupled with a unique distribution model, has been foundational to its growth and market positioning.

The Brazilian fintech market is dynamic and innovative, characterized by accelerating digital payments adoption. The total addressable market across payments, banking, credit, and software for MSMBs represents a substantial BRL 100 billion revenue opportunity. StoneCo's historical journey, including the 2021 acquisition of Linx to expand software capabilities and the 2023 relaunch of its credit offerings, has continuously shaped its strategic responses to market dynamics. The company's proprietary technology, particularly its end-to-end cloud-based platform, offers seamless integration for merchants across in-store, online, and mobile channels. This technological backbone provides tangible benefits such as efficient transaction processing, enhanced reconciliation capabilities, and robust fraud prevention, which are critical for its MSMB client base.

StoneCo's distribution capabilities, notably its proprietary and franchised Stone Hubs, represent a significant technological differentiator. These hubs offer hyper-local sales and services, providing a physical touchpoint that complements its digital offerings. This hybrid model allows for a deeper understanding of client needs and faster problem resolution, fostering stronger customer loyalty and recurring revenue streams. The company is also actively leveraging data and artificial intelligence (AI) to enhance its operational distribution platform, aiming for greater efficiency and more assertive targeting of growth opportunities. This focus on technology-driven operational excellence is expected to improve efficiency over time, contributing to long-term value creation.

Competitive Positioning and Differentiated Edge

In the fiercely competitive Brazilian fintech arena, StoneCo strategically positions itself against a diverse set of players. Direct competitors include PagSeguro Digital Ltd. (PAGS), MercadoLibre Inc. (MELI), and Nu Holdings Ltd. (NU). StoneCo's merchant-focused solutions and hybrid distribution model provide a distinct advantage. While PAGS excels in a digital-first approach, StoneCo's Stone Hubs offer a more integrated in-person experience, fostering stronger loyalty and deeper relationships with brick-and-mortar merchants. This localized support exploits a potential weakness in PAGS's purely digital model.

Against MercadoLibre, a dominant e-commerce and fintech platform, StoneCo differentiates itself by specializing in SMBs with a focus on seamless integration across various channels. MELI's broader ecosystem, including logistics and consumer financing, offers expanded reach, but StoneCo's tailored technology and hyper-local support can deliver superior customer service and faster adoption for its target merchants. StoneCo's cost-effective distribution also provides an edge in efficiency, allowing it to compete effectively against MELI's scale by targeting niche SMB segments.

Nu Holdings, primarily a digital bank, focuses on broader consumer and business banking. StoneCo, however, leads in specialized merchant services, offering proprietary technology for electronic commerce that provides greater reliability in transaction processing. While NU has demonstrated faster market penetration in consumer banking, StoneCo's direct merchant engagement via Stone Hubs builds long-term relationships, potentially leading to stronger recurring revenue. The company's ability to bundle multiple financial services, including payments, banking, and credit, further strengthens its competitive moat, making it a more comprehensive partner for MSMBs. Management observes a rational competitive environment, with pricing largely based on bundling and return hurdles, rather than aggressive volume-at-any-cost strategies.

Strategic Refocus: Divesting for a Sharper Vision

A pivotal strategic shift for StoneCo has been the divestiture of its non-core software assets, a move that aligns with its future direction and a more focused approach to capital allocation. As announced in Q2 2025, the company agreed to sell Linx to TOTVS for an enterprise value of BRL 3.05 billion, retaining BRL 3.8 billion in goodwill from the original 2021 acquisition. Additionally, SimplesVet was sold to PetLove for BRL 140 million plus net cash, with this deal closing in July 2025. These software assets accounted for only about 8% of revenues and 5% of the consolidated bottom line for the first half of 2025, yet their divestiture unlocks over BRL 4 billion in value, roughly 25% of StoneCo's current market capitalization.

This strategic move allows StoneCo to concentrate its efforts and resources on its highest-growth, most profitable segments within financial services, which still target over 90% of its substantial total addressable market. While software will remain part of its broader ecosystem, it is now viewed as a value-added layer with low capital requirements rather than a core offering. This asset-light approach is expected to drive greater shareholder value by enhancing focus and capital efficiency. The company is now reporting discontinued operations as a single line item, reflecting its commitment to transparently showcasing the performance of its core, ongoing business.

Financial Performance and Operational Momentum

StoneCo's financial performance in Q2 2025 underscores the success of its strategic refocus and disciplined execution. Adjusted net income accelerated to a 27% year-over-year increase, reaching BRL 631 million, with the majority of this growth (21%) stemming from its financial services operation. Adjusted basic EPS saw an impressive 45% year-over-year increase, further bolstered by the company's share repurchase program. The Financial Services segment achieved a robust 30% Return on Equity (ROE), with consolidated ROE reaching 22%, both growing 3 percentage points sequentially.

Revenues from continuing operations grew 20% year-over-year to BRL 3.5 billion in Q2 2025, primarily driven by successful repricing initiatives. This was partially offset by a reduction in floating revenues as client deposits were increasingly utilized as a low-cost funding source. This shift, however, is accretive to the bottom line, as the reduction in financial expenses from lower funding costs more than compensates for the lost floating revenue.

Adjusted gross profit from continuing operations reached BRL 1.6 billion, growing 14% year-over-year, outpacing MSMB TPV growth by 2 percentage points. This indicates effective monetization through pricing discipline, increased client engagement, and an efficient funding strategy.

Operational metrics highlight strong client engagement and ecosystem expansion. The MSMB payments active client base grew 17% year-over-year to 4.5 million clients in Q2 2025, with 38% classified as "heavy users" utilizing more than three solutions. MSMB TPV grew 12% year-over-year to BRL 122 billion, driven by a 59% surge in MSMB PIX QR Code volumes, which continues to gain share over traditional debit card transactions, and a 6.4% growth in card TPV. The active banking client base expanded 23% year-over-year to 3.3 million clients, and client deposits grew significantly by 36% year-over-year or 7% quarter-over-quarter. Notably, 83% of total deposits are now time deposits, reflecting a strategic shift towards a more stable and lower-cost funding source.

The credit portfolio demonstrated strong sequential growth, increasing 25% to BRL 1.8 billion in Q2 2025. Merchant solutions, mainly working capital, comprised BRL 1.6 billion of this, with disbursements increasing 41% quarter-over-quarter. The credit card portfolio also grew 19% sequentially to BRL 192 million. While 15- to 90-day NPLs decreased 10 basis points sequentially, and over 90-day NPLs increased only marginally by 10 basis points, the company made a deliberate decision to increase provisions for expected losses from BRL 34 million in Q1 2025 to BRL 82 million in Q2 2025. This conservative approach, in light of a weaker macro outlook, pushed the cost of risk to 20%, though it would have been 13.5% excluding this adjustment. Management expects the cost of risk to normalize to the mid-teens (13.5% to 15%) going forward.

Capital Allocation and Shareholder Returns

StoneCo's commitment to disciplined capital allocation is a cornerstone of its investment thesis. The company has established a robust framework based on three pillars: maintaining a minimum common capital ratio of 20% of risk-weighted assets, aligning credit rating metrics with banking peers, and maintaining a positive adjusted net cash balance. As of December 31, 2024, StoneCo estimated it had over BRL 3 billion in excess capital.

The proceeds from the software divestitures, combined with the retained goodwill benefit, unlock over BRL 4 billion, which the company intends to allocate in line with its capital framework. If immediate value-accretive growth opportunities are not identified, StoneCo plans to return this excess capital to shareholders. The company has already demonstrated this commitment by returning 41% of the BRL 3 billion excess capital generated in 2024 through share buybacks by the end of June 2025, totaling approximately BRL 2.6 billion over the last 12 months. A new BRL 2 billion share repurchase program was announced in Q1 2025, replacing the previous one. Management views these buybacks as a highly attractive and value-accretive use of capital at current levels.

Outlook and Guidance: A Path to Profitable Growth

StoneCo's forward-looking guidance reflects its confidence in the refocused strategy and operational execution, even amidst a challenging macroeconomic environment. For 2025, the company expects adjusted gross profit to surpass BRL 6.3 billion, implying over 14.5% year-over-year growth. Adjusted basic EPS is projected to increase from 18% to 32% year-over-year, a 14 percentage point upgrade, reflecting share buybacks and stronger-than-anticipated net income performance. This implies an adjusted net income guidance upward from BRL 2.4 billion to BRL 2.6 billion.

Looking further ahead to 2027, StoneCo projects MSMB TPV to surpass BRL 670 billion, implying a 2024-2027 CAGR above 14%. Adjusted gross profit is expected to exceed BRL 10.2 billion (CAGR over 18%), and adjusted basic EPS is targeted to exceed BRL 15 per share (CAGR over 27%). The implicit adjusted net profit guidance for 2027 remains at BRL 4.3 billion, indicating an upgrade in the original implicit guidance for EPS despite aggressive share repurchases.

Management acknowledges that MSMB TPV growth may stabilize at low double-digits in the second half of 2025 due to repricing initiatives and a tougher macro environment. However, the company emphasizes that TPV growth is not the sole focus; rather, it is a consequence of evolving the business and its value proposition. Profitability is driven by multiple monetization drivers, cost discipline, and capital allocation, with the company confident in delivering its long-term targets even if TPV growth is softer than initially anticipated. The Financial Services segment's ROE, already at 30% in Q2 2025, is considered to be on the lower bound, suggesting further upside once excess capital is optimized.

Risks and Challenges

Despite a compelling growth story, StoneCo faces several risks. The macroeconomic environment in Brazil, characterized by higher interest rates and signs of economic deceleration, poses a challenge to TPV growth and client same-store sales, particularly for smaller merchants. While the company has implemented pricing adjustments to mitigate interest rate impacts, aggressive repricing could lead to some client churn, though current levels remain below expectations.

Managing credit quality is another critical aspect. While NPL levels have remained healthy, the expansion of the credit portfolio, especially into limit-based offerings, necessitated a conservative increase in provisions for expected losses in Q2 2025. Although this is considered a one-off adjustment, sustained economic weakness could pressure asset quality. Competition, while currently rational, could intensify, potentially impacting pricing power or market share gains. StoneCo's reliance on the Brazilian market also exposes it to country-specific economic and regulatory fluctuations.

Conclusion

StoneCo Ltd. is at a pivotal juncture, strategically sharpening its focus on the lucrative and expanding financial services market for Brazilian MSMBs. The divestiture of non-core software assets, while a significant structural change, is a calculated move to unlock capital and concentrate resources on its most profitable growth engines: payments, banking, and credit. This strategic clarity, combined with a robust financial performance characterized by accelerating net income and expanding ROE in its core segments, paints a compelling picture for investors.

The company's differentiated hybrid distribution model, proprietary technology, and disciplined approach to pricing and capital allocation provide a strong competitive moat against both traditional and digital-first rivals. While macroeconomic headwinds and evolving TPV dynamics present challenges, StoneCo's diversified monetization strategies, commitment to shareholder returns through buybacks, and clear long-term guidance underscore its potential for sustainable, profitable growth. The emphasis on maximizing intrinsic business value per share, rather than solely scale, positions StoneCo as a resilient and attractive investment in Brazil's dynamic fintech landscape.