Executive Summary / Key Takeaways

Strategic Refocusing Unlocks Value: StoneCo's divestiture of non-core software assets (Linx, SimplesVet) in 2025 unlocked over BRL4 billion in value while eliminating a BRL3.6 billion goodwill impairment drag, allowing management to concentrate entirely on its highest-margin financial services segment, which now accounts for over 90% of its addressable market and generates a 33% ROE.

Profitability Over Volume Drives Margin Expansion: The company has fundamentally shifted from pursuing market share at any cost to prioritizing pricing discipline and profitability, implementing repricing initiatives across its client base that contributed to a 19% year-over-year gross profit growth in Q1 2025 and a gross profit yield improvement to 1.26% by Q3 2025, despite deliberate TPV growth deceleration.

Deposit Funding Advantage Creates Structural Edge: StoneCo's cash sweep strategy, converting retail deposits into on-platform time deposits, is reducing funding costs by an estimated 75-125 basis points annually while client deposits grew 32% year-over-year to BRL9 billion, creating a self-reinforcing ecosystem where payment processing drives banking relationships that lower capital costs.

Credit Portfolio Growth Balanced With Risk Management: The credit portfolio expanded 27% sequentially to BRL2.3 billion in Q3 2025, with management proactively increasing coverage ratios and cost of risk to 16.8% in anticipation of macroeconomic deterioration, demonstrating disciplined growth rather than reckless expansion.

Attractive Valuation Amid Strategic Clarity: Trading at $14.68 with an EV/Revenue multiple of 2.36x and strong capital returns (BRL2.6 billion in share buybacks over the last 12 months), StoneCo offers exposure to Brazil's digital payments growth at a reasonable valuation, particularly as the simplified business model improves earnings quality and predictability.

Setting the Scene: From Software Aspirations to Financial Services Pure-Play

StoneCo Ltd., founded in 2012 in George Town, the Cayman Islands, began as a pure-play fintech focused on payment processing for micro, small, and medium-sized businesses (MSMBs) in Brazil. The company's early growth trajectory was impressive, capturing market share through a hybrid model combining physical Stone Hubs for local support with integrated technology solutions. However, in 2021, management made a strategic bet that would later prove misguided: the acquisition of Linx, a software company intended to provide cross-selling opportunities into financial services.

This software expansion initially aimed to leverage software assets to deepen client relationships and create new revenue streams. By November 2023, during its Investor Day, StoneCo was still promoting a strategy focused on cross-selling financial services through software divisions targeting four priority verticals. Yet beneath the surface, cracks were emerging. The software business required significant capital investment, consumed management attention, and ultimately failed to deliver the synergies envisioned. In 2024, the company recognized a staggering BRL3.6 billion goodwill impairment charge for its software cash-generating units, a stark admission that owning software assets was not essential for executing its cross-selling strategy.

The year 2025 marked a decisive inflection point. Management executed a strategic about-face, divesting Linx to TOTVS (TOTS3) for BRL3.05 billion and SimplesVet to PetLove for BRL140 million. These divestitures unlocked over BRL4 billion in total value while retaining BRL3.8 billion in goodwill for amortization over eight years. More importantly, they freed StoneCo to focus exclusively on its financial services ecosystem—payments, banking, and credit—where it holds sustainable competitive advantages and which accounts for over 90% of its total addressable market.

This pivot occurred against a challenging macroeconomic backdrop. Brazil's economy faces higher interest rates, economic deceleration, and accelerating PIX adoption that cannibalizes traditional debit card volumes. The broader payments industry is experiencing margin pressure from competition and instant payment systems. StoneCo's response has been to embrace these headwinds as catalysts for discipline rather than excuses for underperformance, fundamentally repositioning the company for sustainable profitability over growth-at-any-cost.

Technology, Products, and Strategic Differentiation: The Integrated Ecosystem Moat

StoneCo's core competitive advantage lies in its integrated financial services platform that combines payment processing, banking solutions, and credit offerings into a single ecosystem. This is not merely a collection of separate products but a deeply interconnected system where each component reinforces the others, creating powerful network effects and switching costs for its 4.7 million active MSMB clients.

The Stone Hubs distribution network represents a critical moat that pure digital competitors cannot easily replicate. These hyper-local service points enable direct, personalized support for SMBs, translating into stronger customer loyalty and reduced churn. In Q3 2025, 38% of clients were classified as heavy users leveraging more than three solutions, up from previous quarters, demonstrating that the ecosystem approach deepens client relationships over time. This matters because heavy users generate substantially higher lifetime value and are significantly less likely to switch to competitors, even when faced with aggressive pricing.

The company's cross-selling strategy has evolved from a vague software ambition to a precise financial services bundling approach. By integrating payments with banking and credit, StoneCo increases client engagement while capturing a larger share of each client's financial workflow. This bundling has led to a fundamental shift in revenue composition, with financial income increasing and transactional revenue decreasing as a percentage of total revenue. The implication is profound: gross profit has become a more comprehensive and accurate metric than take rate alone, as it captures the full value extracted from each client relationship.

Perhaps the most innovative strategic initiative is the cash sweep strategy, which converts retail deposits into on-platform time deposits. By issuing certificates of deposit, StoneCo reduces its cost of funding by an estimated 75-125 basis points on migrated volumes. In Q3 2025, client deposits reached BRL9 billion, growing 32% year-over-year, with time deposits accounting for 84% of the total. This creates a structural funding advantage over competitors reliant on external capital, directly improving net interest margins and bottom-line profitability. The strategy also locks clients deeper into the ecosystem, as moving deposits elsewhere means losing access to integrated financial services.

PIX adoption, while cannibalizing debit card volumes, has proven accretive to StoneCo's results. The company monetizes PIX transactions in line with debit cards, and the increased transaction flow drives higher deposit generation. In Q3 2025, PIX QR code volumes grew 49% year-over-year while card volumes grew only 6%, yet gross profit yield improved to 1.26%.

This demonstrates that StoneCo can adapt to industry disruption better than traditional acquirers, turning a potential threat into a competitive advantage by leveraging its integrated ecosystem.

Financial Performance & Segment Dynamics: Evidence of Strategic Execution

StoneCo's financial results provide compelling evidence that the strategic pivot is working. The Financial Services segment's Return on Equity (ROE) has demonstrated remarkable progression: 27% in 2024, accelerating to 30% in Q2 2025, and reaching 33% in Q3 2025. This trajectory reflects successful pricing policy adjustments, strategic use of client deposits as a funding source, and improved operational efficiency. For investors, this ROE expansion signals that management is allocating capital more effectively within the focused business model, generating higher returns on each real invested.

Total revenue and income from continuing operations grew 16% year-over-year to BRL3.6 billion in Q3 2025, while adjusted gross profit from continuing operations reached BRL1.6 billion, growing 12% year-over-year. The gap between TPV growth (11% year-over-year) and gross profit growth reveals the success of the repricing strategy. Management explicitly stated that TPV growth deceleration reflects deliberate repricing initiatives and a weaker macro environment impacting same-store sales. This trade-off—sacrificing some volume growth for significantly improved profitability—is exactly what the market should want to see in a mature fintech facing macro headwinds.

The Payments Business for MSMBs shows the tension between growth and profitability. The active client base grew 17% year-over-year to 4.7 million, yet MSMB TPV growth slowed to 11% year-over-year in Q3 2025 from 17% in Q1. Card TPV grew only 6% year-over-year while PIX volumes surged 49%. Despite this mix shift, gross profit yield increased to 1.26% in Q3 2025 from 1.21% in early 2024, primarily due to increased penetration of banking and credit solutions. This proves that StoneCo can maintain pricing power and expand margins even as the industry shifts to lower-cost payment methods.

The Banking Operation has become a powerful value driver. Active banking clients increased 22% year-over-year to 3.5 million, while client deposits grew 32% year-over-year to BRL9 billion. Deposits now represent 7.1% of MSMB TPV, up from 6.8% in 2024, indicating deepening client engagement. The average daily deposit base increased 40% year-over-year, providing a stable, low-cost funding source that reduces reliance on external capital markets. This matters because it lowers financial expenses, improves net interest margins, and creates a self-funding growth engine that competitors without banking licenses cannot replicate.

The Credit Operation demonstrates disciplined expansion. The total portfolio grew 27% sequentially to BRL2.3 billion in Q3 2025, with merchant solutions (working capital) growing 28% quarter-over-quarter to BRL2.1 billion. Despite rapid growth, management has proactively increased risk provisions, with cost of risk rising to 16.8% sequentially from 10% in Q1 2025. This increase reflects a deliberate decision to boost coverage levels in light of a weaker macroeconomic outlook, not deteriorating portfolio quality. NPLs over 90 days stood at 5.03% in Q3, up modestly as the portfolio matures, but remain well-controlled. This balanced approach—growing the portfolio while building reserves—protects against future losses and demonstrates sophisticated risk management.

The Software divestiture has removed a significant drag on performance. In H1 2025, the divested assets accounted for only 8% of revenues and 5% of the consolidated bottom line, yet consumed disproportionate management attention and capital. The BRL3.8 billion in retained goodwill will amortize over eight years, providing a non-cash tax shield that enhances cash flow. This strategic pruning allows StoneCo to focus resources on its highest-return opportunities, improving overall capital allocation efficiency.

Outlook, Management Guidance, and Execution Risk

Management's guidance for 2025 reflects confidence in the refocused strategy. Adjusted gross profit is expected to exceed BRL7.05 billion (14% year-over-year growth), while adjusted basic EPS is projected above BRL8.6 per share (18% growth). The implied adjusted net income guidance of BRL2.6 billion represents an upward revision from earlier BRL2.4 billion guidance, driven by stronger execution and share buybacks. For investors, this guidance signals that the strategic pivot is delivering tangible financial results rather than just narrative.

The 2027 long-term guidance, established before the software divestiture, may require revision. Management targets MSMB TPV surpassing BRL670 billion (implying a 14% CAGR from 2024), adjusted gross profit exceeding BRL10.2 billion (18% CAGR), and adjusted basic EPS above BRL15 per share (27% CAGR). However, management acknowledged that TPV performance has been more challenging than anticipated due to macroeconomic headwinds, and they plan a comprehensive review of 2027 guidance. This honesty is crucial—it suggests management will set realistic targets rather than chase unattainable growth, reinforcing the profitability-over-volume ethos.

Key execution risks center on macroeconomic deterioration and credit quality. Lia Matos noted that the company expects the second half of 2025 to face a tougher environment, with MSMB TPV growth stabilizing at low double-digits. The weaker macro environment is expected to impact smaller clients disproportionately, potentially increasing NPLs and requiring further provision builds. Management's proactive credit model updates and increased coverage ratios demonstrate awareness of this risk, but investors should monitor NPL trends closely as a leading indicator of portfolio stress.

The pricing strategy introduces competitive dynamics. While repricing has improved margins, it contributed to market share loss in Q2 2025. Lia Matos stated the company saw a bigger market share loss as a result of repricing decisions but characterized this as a "one-time effect" that should stabilize. This trade-off—accepting temporary share loss for permanent margin improvement—is rational in a competitive market, but requires monitoring to ensure competitors don't gain permanent footholds with subsidized pricing.

Capital allocation remains shareholder-friendly. StoneCo returned BRL2.6 billion through share buybacks over the last 12 months, representing 41% of the BRL3 billion excess capital identified in 2024. Management stated the most likely scenario for repurchased shares is cancellation, with some used for share-based compensation. This commitment to returning capital when value-accretive growth opportunities are limited signals disciplined stewardship and provides downside protection for the stock.

Risks and Asymmetries: What Could Break the Thesis

The central investment thesis faces several material risks that could impair returns. First, macroeconomic deterioration in Brazil poses a significant threat. Higher interest rates and economic deceleration are already impacting same-store sales for MSMB clients, contributing to TPV growth deceleration. If the economy weakens further, credit losses could exceed management's conservative provisions, and client acquisition could slow, undermining both revenue growth and the deposit funding strategy. The risk is particularly acute for smaller clients who lack financial buffers.

Second, competitive pressure from PIX and rival fintechs could compress margins more than anticipated. While StoneCo has successfully monetized PIX, its continued adoption may pressure traditional payment fees industry-wide. Competitors like PagSeguro (PAGS), with its strong digital banking growth (50% surge in Q3 2025), and incumbents like Cielo (CIEL3), with their established enterprise relationships, could respond to StoneCo's repricing with aggressive promotions, forcing a choice between margin defense and market share retention. Mateus Scherer's observation that "the whole industry is repricing" suggests rational behavior, but any player pursuing growth at any cost could disrupt this equilibrium.

Third, credit portfolio maturation presents inherent risks. While management has proactively increased provisions, the portfolio's rapid 27% sequential growth means it hasn't been tested through a full economic cycle. NPLs over 90 days, at 5.03% in Q3, are expected to rise toward "high single digits" as the portfolio seasons. If macro conditions deteriorate faster than expected, actual losses could exceed the BRL2.3 billion portfolio's coverage, creating a material earnings hit and capital drain.

Fourth, execution risk on the cross-sell strategy remains. While 38% of clients are heavy users, that implies 62% are not fully penetrated. Converting these clients to banking and credit users requires continued investment in platform capabilities and sales execution. If cross-sell momentum stalls, the gross profit yield expansion could reverse, undermining the core earnings growth story.

On the upside, asymmetries exist. If Brazil's macro environment stabilizes or interest rates decline, StoneCo could benefit from both improved client financial health and lower funding costs. Mateus Scherer noted that every 100 basis point cut in interest rates provides a BRL200-250 million EBT benefit. Additionally, if the cash sweep strategy converts more of the BRL9 billion deposit base to time deposits, funding cost savings could exceed the 75-125 basis point estimate, providing upside to margin guidance.

Valuation Context: Reasonable Multiple for Transforming Business

At $14.68 per share, StoneCo trades at a market capitalization of $3.93 billion and an enterprise value of $5.92 billion. The EV/Revenue multiple of 2.36x and Price/Sales ratio of 1.56x position it at a premium to some peers but reflect the transformed business quality. For context, PagSeguro (PAGS) trades at 0.84x EV/Revenue and 0.80x P/S, but generates lower operating margins (38.37% vs. StoneCo's 52.34%) and slower growth in its core payments business. The valuation gap reflects StoneCo's superior margin profile and strategic focus.

The company's profitability metrics show the impact of the software impairment, with a negative profit margin of -7.76% and ROE of -8.45% on a trailing twelve-month basis. However, these figures are distorted by the BRL3.6 billion non-cash impairment. The core Financial Services segment's ROE of 33% in Q3 2025 provides a clearer picture of normalized earnings power. Adjusted net income from continuing operations grew 18% year-over-year in Q3, demonstrating the underlying business's health.

Balance sheet strength supports the valuation. StoneCo maintains a net cash position with a current ratio of 1.43 and quick ratio of 1.20, providing ample liquidity to fund growth and weather macro volatility. The debt-to-equity ratio of 1.42 is manageable, and the company has no immediate refinancing pressures. More importantly, the capital allocation framework—targeting a minimum 20% common capital ratio and maintaining positive adjusted net cash—ensures financial stability while returning excess capital to shareholders.

The aggressive share repurchase program, with BRL2.6 billion executed over the last 12 months, represents 66% of the current market capitalization, signaling strong management conviction in the stock's value. This capital return, combined with the BRL3.8 billion in retained goodwill amortization that will provide tax shields over eight years, creates a compelling value proposition for long-term investors.

Relative to historical multiples, StoneCo's current valuation appears attractive given the strategic clarity and margin expansion trajectory. The company's forward-looking metrics—2025 EPS growth guidance of 18% and 2027 EPS CAGR of 27%—suggest the market has yet to fully price in the benefits of the strategic pivot. While the trailing multiples may seem elevated due to impairment charges, the forward EV/EBITDA of 4.40x is reasonable for a business generating 33% ROE with a self-funding growth model.

Conclusion: Focused Execution at a Reasonable Price

StoneCo has completed a remarkable strategic transformation, evolving from a fintech with misguided software ambitions into a focused financial services pure-play with durable competitive advantages. The divestiture of Linx and SimplesVet unlocked over BRL4 billion in value while eliminating a significant earnings drag, allowing management to concentrate on its integrated payments, banking, and credit ecosystem. This focus is delivering results: Financial Services ROE has accelerated to 33%, gross profit yield has expanded to 1.26%, and client deposits have grown 32% year-over-year to BRL9 billion, creating a low-cost funding advantage.

The central thesis hinges on two variables: management's ability to maintain pricing discipline while growing the credit portfolio prudently, and the macroeconomic environment's impact on MSMB clients. The company's proactive risk management—increasing credit provisions and adjusting models for weaker conditions—demonstrates sophistication, but cannot fully insulate against a severe Brazilian recession. Similarly, while the repricing strategy has improved margins, it requires continued execution on cross-selling to offset potential volume share losses.

Trading at $14.68 with an EV/Revenue of 2.36x and strong capital returns, StoneCo offers investors exposure to Brazil's digital payments transformation at a reasonable valuation, particularly as the simplified business model improves earnings quality. The 33% ROE, self-funding deposit strategy, and aggressive share repurchases create a compelling combination of growth, profitability, and shareholder alignment. For investors willing to accept Brazil's macro risks, StoneCo's focused execution and structural advantages position it to outperform less disciplined competitors and deliver sustained earnings growth through the cycle.