Following the resounding success of PagSeguro’s IPO, investors will likely try to measure Stone — the next Brazilian acquirer to go public — with the same ruler they used to value its competitor.
But a comparison of the two companies’ business models suggests Stone may have a more adequate peer in Square, the payments company founded by Jack Dorsey, who also founded Twitter. Both Stone and Square cater to the same type of customer and function as platforms that can add new products over time.
Just a few years ago, the two companies weren’t so similar. Square started out with a business model similar to that of PagSeguro: focused on very small merchants who ordered the company’s card reader — a little ‘square’, hence the company’s name — online and got it by mail.
In its last capital round before the IPO, Square was valued at US$ 3.5 billion. After the IPO, at the end of 2015, the company pivoted to a strategy more similar to Stone’s — focused on formal retailers with physical stores — and is now worth US$ 35 billion on the New York Stock Exchange.
With a 5.4% share of the Brazilian card transactions market, Stone last week filed with the SEC to go public on the Nasdaq. It is not clear if the offer will be launched before or after the Oct. 28 runoff of Brazil’s presidential election, but despite all the political noise in the country, the offer will likely lure the same type of investor that was behind PagSeguro’s blockbuster IPO: global portfolio managers of tech and EM funds.
Goldman Sachs, JP Morgan and Citigroup are the global coordinators, while bookrunners also include Itaú BBA, Credit Suisse, Morgan Stanley, BofA Merrill Lynch and BTG Pactual.
According to PMs who have been poring over the offering documents, Stone could earn as much as R$ 300 million this fiscal year (an extrapolation that starts with the R$ 100 million bottom line reported in the first half and takes into account the second half’s seasonality). According to the offering prospectus, Stone’s revenue is growing almost 100% a year (92% in the first half).
Assuming the company is headed to the sweet spot of its operating leverage, this year’s R$ 300 million profit may take off to R$ 1 billion in 2019 — just like PagSeguro saw its profit balloon as 2017 turned into 2018.
Comparisons with PagSeguro are unavoidable. The Frias family’s business trades at about 25 times its estimated profit for 2019. Applying the same multiple, analysts estimate that Stone could have a market value of US$ 25 billion to US$ 35 billion.
Stone’s total processing volume is a bit higher than PAGS’s. Taking into account the second quarter of both companies, Stone is expected to process about R$ 74 billion this year, compared to PAGS’s R$ 68 billion.
One big difference between the two companies is their capital structure. While PagSeguro is funded only with the proceeds from its IPO (equity), Stone last year created a R$ 1 billion credit-rights investment fund (known in Brazil as FIDC) and other similar funding structures. Those vehicles allow the company to finance customer’s prepayment operations at a lower cost than an ordinary banking line. Stone’s IPO proceeds will likely boost the company’s financing capacity and profitability.
Another difference: while Stone grew up competing with the old duopoly formed by incumbents Rede and Cielo, PagSeguro created a niche market for itself: individual microentrepreneurs (MEIs in the Portuguese acronym). But that niche is now being aggressively attacked by other players.
Unlike PagSeguro, Stone has a proprietary distribution force that interacts directly with merchants. The company has never disclosed the size of its commercial staff, but the teams — which combine sales, service and support — are organized around 180 Stone Hubs around the country and are key to the company’s customer relationship.
In the offering prospectus, Stone claims to have more than 200,000 active customers in Brazil, and suggests that it will explore that distribution channel to offer other products such as CRM solutions and loyalty programs — an option that the market will certainly look to discuss during the roadshow. Stone also says it is exploring “complementary business opportunities in adjacent sectors such as digital banking and specific vertical software solutions.” In Brazil, there are 8.8 million small and medium-sized companies, Stone’s target clients.
Stone is the fourth company founded by André Street, a serial entrepreneur who made his first venture at the age of 15 — and sold it at 20.
In its six-year history, Stone has made several private rounds, attracting investors such as T. Rowe Price; Tiger Global Management; Gávea Investimentos; Madrone, the investment vehicle of Wal-Mart’s Walton family; as well as Jorge Paulo Lemann, Marcel Telles and Carlos Alberto Sicupira, the trio behind 3G Capital. It is not clear which shareholders will be sellers in the offering. Months ago, Stone skipped another private round of US$ 250 million and decided to go public.
Prior to Stone, Street and his partner Eduardo Pontes founded and/or invested in other payment companies such as Braspag, MOIP and Sieve Group . The investments were made through Arpex, the duo’s investment vehicle.
The Stone IPO comes at a time of unprecedented competition for Brazil’s acquirers, an industry that is being redesigned by evolving technologies — which allow for new customer functionalities — and by regulators keen on promoting competition, such as the Central Bank and CADE, the antitrust body.
Like all players, Stone suffers price pressure from this environment, but the company has largely benefited from falling regulatory barriers. The recent change in so-called ‘banking lock agreements’, for example, helps the company boost its addressable market by winning over customers who have been previously locked in the ecosystem of large banks.