Fund Managers See Buffett-Backed StoneCo Sinking Below IPO Price

(Bloomberg) -- The rout may not be over for shares of StoneCo Ltd., according to some of Brazil’s top fund managers, as a steep valuation and fiercer competition threaten to drag it below it’s listing price.

“Stone is extremely expensive,” said Joao Braga, co-head of equities at XP Asset Management, one of Brazil’s best performing hedge-fund managers, in an interview.

According to Braga, the stock is pricing in a lot of growth “that may not come” and could fall to below $20 per share “amid a storm of bad news.” Stone priced an upsized initial public offering last October, with investors like billionaires Warren Buffett and Alibaba’s Jack Ma agreeing to pay $24 a share.

The Brazilian firm fell 24 percent last Thursday, its biggest tumble on record, after Itau Unibanco Holding SA’s card-acquiring unit Rede announced plans to eliminate the fees for prepayments on some credit card transactions, fueling concerns of an accelerating price war in the sector and prompting similar moves by competitors.

“It’s difficult to understand the stock’s current price,” said Leonardo Rufino, a portfolio manager at Pacifico Gestao de Recursos. “The multiples are quite elevated, the competition may become even harsher and the company needs to deliver a huge growth,” Rufino said. The stock is currently trading at 31 times estimated earnings, versus 9 times for Cielo SA, its biggest competitor, according to data compiled by Bloomberg.

A spokesperson for StoneCo declined to comment when contacted by Bloomberg. In a letter to shareholders last Friday, Chief Executive Officer Thiago Piau wrote that the company is “always monitoring our competitive landscape and taking note of various marketing programs, competitor initiatives and potential anti-competitive actions."

Increased competition

"Stone may be able to compete with differentiated service but they also seem very vulnerable," said Bradford Jones, a money manager at Sagil Asset Management in London.

Brazil’s biggest payments company Cielo SA has been slashing prices to defend market share, amid increasingly challenging competition. On Monday, PagSeguro Digital Ltd announced the launch of a service that will allow merchants to instantly receive the proceeds from debit and credit cards purchases. The recent wave of price cuts was triggered by Banco Santander Brasil SA, which targeted smaller merchants with cheaper products.

AllianceBernstein’s portfolio manager Morgan Harting is also staying away from Brazilian payments firms at this moment. “We see better opportunities elsewhere, including Alibaba, which has a more clearly dominant position in payments.”

“The weak momentum in these names calls into question how favorable the prospects for their competitive positions are,” Harting said.

Stone shares fell as much as 4 percent in New York on Tuesday. The company’s IPO lock-up is expiring today, according to Bloomberg data.

--With assistance from Felipe Marques.

To contact the reporter on this story: Vinícius Andrade in São Paulo at vandrade3@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Morwenna Coniam, Steven Fromm

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