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StoneCo (NASDAQ: STNE) is up nearly 30% this week after the Brazilian fintech company announced yet another impressive quarter. But its shares also previously rallied hard in August after the company posted an equally impressive second-quarter update — only to promptly give up those gains in September. So is it really safe for investors to assume StoneCo’s post-earnings rally is sustainable this time?

Nobody can make any firm promises to that end, of course. But I think StoneCo’s recent gains are significantly safer this time around for one big reason: At long last, StoneCo finally appears to be firing on all cylinders again.

On StoneCo’s previous misfires

Before we recap StoneCo’s latest exceptional quarter, perspective is in order. Recall that the company previously had to grapple with the fallout of soaring interest rates in Brazil eating into its profit margins back in 2021. As rates skyrocketed and the Central Bank of Brazil (BCB) rushed to bring inflation under control, StoneCo initially (and admirably) refused to pass along increased costs to its core base of micro, small, and medium-sized business (MSMB) clients.

To make matters worse, StoneCo also suffered significant losses in its credit product for small businesses after technical glitches mired the launch of the Brazilian central bank’s new financial registry system (discussed in the white paper the company published at the time); that caused the company to cease disbursements while it redesigned the product. And though StoneCo finally caved and gradually implemented repricing initiatives in late 2021 to offset those inflation-fueled cost increases, its shares had already plummeted more than 80% from their peak by that time.

Even up through last quarter (Q2 2023), StoneCo was still working on relaunching its credit product, which effectively remained in a pilot stage as the company tested its comprehensive redesign on a small scale.

Firing on all cylinders today

Fast-forward to StoneCo’s third-quarter 2023 report, announced earlier this week. The once-again thriving fintech stock says it’s now on pace to achieve its first full-year profit after two straight years of losses. Quarterly revenue grew 25.2% year over year, to 3.14 billion Brazilian reals ($645.3 million USD), translating to adjusted (non-GAAP) earnings of 1.32 reals per share ($0.27 USD), up from 0.35 reals per share in the year-ago period. Both the top and bottom lines were well above analysts’ consensus estimates, which had called for third-quarter earnings of 1.13 reals per share on revenue of 3.08 billion reals.

Delving deeper into StoneCo’s results, MSMB active payment clients grew by 317,200 sequentially from last quarter (and 41.7% year over year) to 3,279,100, with improving churn across all tiers of clients. MSMB total payment volume (TPV) grew 19.9% to 89.6 billion reals. MSMB average monthly TPV per client declined 19.2% year over year — a largely expected result as StoneCo focused on strategically growing its “Ton” solution; it focuses primarily on micro-merchants, which have lower average TPVs compared to the SMB merchant base. Meanwhile, MSMB take rates remained steady, expanding one basis point sequentially from last quarter to 2.49%.

StoneCo’s banking solutions segment is also thriving. The banking client base grew more than 15% sequentially from last quarter and 244% year over year to over 1.9 million active clients. Total deposits jumped 13.6% from last quarter and more than 51% year over year to 4.45 billion reals.

Meanwhile, among StoneCo’s “key accounts” clients — primarily larger companies for which its payment service provides fintech infrastructure — TPV declined 22.8% year over year, while take rate rose 18% year over year to 1.13%. The former metric admittedly looks bad at a glance, but those declines were by design: StoneCo has opted to deprioritize and offboard lower-margin key accounts clients over the past year.

Finally, here’s where things get even more exciting: StoneCo’s credit solutions segment disbursed 101.7 million reals (or $20.9 million) of new credit product to 3,075 clients in Q3, bringing its credit portfolio to 113.5 million reals at the end of the quarter. And this time, rather than immediately incurring massive losses amid high delinquency rates as it did before, StoneCo said delinquencies are “in line or better than expectations.” The company is now gradually accelerating disbursement amounts by extending its credit product to a larger number of clients while maintaining its risk standards.

On long-term guidance and the (latest) repurchase authorization

As if its exceptional quarter wasn’t enough, after Tuesday’s market close (Nov. 14), StoneCo followed by announcing a new share-repurchase program worth 1 billion reals. The new authorization replaces the smaller 300 million reals repurchase program that StoneCo already completed, after only just announcing it in early October.

Finally, earlier Wednesday morning (Nov. 15) and ahead of its 2023 investor day presentation, StoneCo issued formal forward guidance calling for compound annual growth rates (CAGRs) from 2024 to 2027 of 13% in MSMB TPV, 26% for client deposits, 90% for its credit portfolio, and 31% for adjusted net income. StoneCo also predicted its MSMB take rates will expand to at least 2.49% by next year and 2.70% by 2027.

All told, StoneCo is executing as effectively as ever in all aspects of its business, and remains perfectly positioned to capture an outsized piece of its estimated 120 billion reals ($24 billion) total addressable market (TAM) for payments, software, banking, and credit for MSMBs in Brazil. That TAM expands to 200 billion reals ($40 billion) when you include its fintech-as-a-service (FaaS) and full-commerce software offerings.

So where does that leave investors today? As long as this business continues firing on all cylinders, I see no reason StoneCo’s share price won’t continue to follow suit.

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Steve Symington has positions in StoneCo. The Motley Fool has positions in and recommends StoneCo. The Motley Fool has a disclosure policy.

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