We recently compiled a list of the 7 Cheap Technology Stocks To Buy Right Now. In this article, we are going to take a look at where StoneCo Ltd. (NASDAQ:STNE) stands against the other cheap technology stocks.
Are Tech Stocks an Opportunity?
Before the Fed announced its September cut, analysts everywhere had clashing opinions with some supporting the 25 basis-point rate cut, and others supporting a massive 50. Even after the decision was announced, all of these analysts maintained their previous positions and continued supporting or opposing the 50 basis-point rate cut. A general advice to investors has been to remain calm and look for opportunities in stocks that could benefit from a lower interest rate environment.
Following the new interest rate announcement, Fed Chair Jerome Powell addressed reporters, affirming the Fed’s commitment to timely monetary policy adjustments. He clarified that the decision to cut rates was based on economic data and emphasized patience in navigating the current economic landscape characterized by high inflation and low unemployment. We covered this earlier in our 10 Worst Artificial Intelligence (AI) Stocks To Buy According to Financial Media article, here’s an excerpt from it:
“In response to a question about whether the rate cut was influenced by recent employment data or the high nominal level of the federal funds rate, he clarified that their policy position was established in July 2023, a period characterized by high inflation and low unemployment. He highlighted their patience in reducing the policy rate, noting that other central banks had already implemented multiple cuts while the Fed had refrained from such actions until now. This patience has reportedly paid off, as there is now greater confidence that inflation is trending sustainably toward the 2% target.
Powell indicated that the recent rate cut should not be interpreted as a new pace for future adjustments but rather as part of a recalibration of policy toward a more neutral level. He referred to the Summary of Economic Projections (S.E.P.) as a guide for understanding potential future cuts, emphasizing that economic developments could lead to adjustments in either direction.”
On September 23, RaeAnn Mitrione, Investment Management Partner at Callan Family Office, appeared in an interview on CNBC and highlighted significant market developments following the Fed’s unexpectedly larger-than-anticipated rate cut last week. This reduction has led to a notable outperformance of the tech sector compared to cyclical and industrial stocks, suggesting a positive market sentiment. Mitrione emphasized that the market is reacting favorably to lower interest rates, particularly benefiting the tech sector. She noted that this trend of broadening out in the market was evident even before the rate cut, with small-cap stocks performing well alongside cyclical sectors. The ongoing theme of AI is expected to continue driving growth within tech for the foreseeable future.
Pointing at a chart, Mitrione remarked that it is unusual to see rate cuts while markets are at record highs, raising questions about potential volatility ahead. Historically, even when rate cuts occur near market peaks, stocks often continue to rise. Much of this positive sentiment has been priced in due to prior indications of the rate cut. She explained that the economy remains strong, and the rate cut serves as a preventive measure rather than a reaction to economic weakness. This supportive environment could enhance consumer confidence and spending, further improving market performance.
As the Personal Consumption Expenditures (PCE) report is coming up on Friday, Mitrione discussed its significance as it informs the Fed’s inflation assessments. While there is a general understanding of the Fed’s direction based on recent economic projections, the focus has shifted more toward employment data. She anticipates that barring any unexpected figures from the PCE report, markets should continue their upward trajectory as rate cuts are likely to persist.
She also shared insights from her research since July 10th, focusing on small-cap stocks, value versus growth dynamics, and their implications for future performance. She observed that expectations regarding these sectors have largely been factored into current prices. Notably, since July 10th, there has been a 10% divergence between growth and value indexes; while growth has slightly declined, value stocks have risen by nearly 8%, with small caps seeing a 10% increase. With interest rates decreasing, small-cap companies are positioned to benefit significantly due to their higher levels of debt and greater exposure to floating rates compared to large-cap firms.
Overall, her analysis underscores a cautiously optimistic outlook for the markets as they navigate through these developments, particularly with tech stocks continuing to lead in performance amidst changing economic conditions. In that context, we’re bringing you a list of the 7 cheap technology stocks to buy right now.
Methodology
We used the Finviz stock screener to compile a list of 20 tech stocks with a forward P/E ratio under 20. We then selected the 7 cheapest stocks that were the most popular among elite hedge funds, and that analysts were bullish on. The stocks are ranked in ascending order of their average upside potential.
Note: The data is sourced as of September 20, 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A team of software engineers in a digital workspace collaborating on a financial technology software solution.
StoneCo Ltd. (NASDAQ:STNE)
Forward Price-to-Earnings Ratio: 7.62
Average Upside Potential: 64.08%
Number of Hedge Fund Holders: 25
StoneCo Ltd. (NASDAQ:STNE) provides financial technology solutions through an end-to-end cloud-based technology platform to conduct electronic commerce across in-store, online, and mobile channels in Brazil. Offerings include payment processing, point-of-sale systems, credit card acquiring, and business loans.
The company differentiates itself with superior client service, tech-enabled distribution, and a comprehensive merchant platform. In financial services, revenue is increasing while maintaining stable margins, and the software business also remains consistently profitable.
Overall, the company generated a revenue of $586.23 million in Q2 2024. However, this was a drop of 1.06% year-over-year. The biggest challenge has been the growth of PIX QR Code payments, which has impacted the card payment volume, with more transactions occurring through PIX QR Code and fewer using cards. While this is positive for the business, TPV growth is lower than expected consequently.
Still, there was robust TPV growth and progress in Credit and Banking. The company remains well-positioned to capture a substantial portion of Brazil’s growing fintech market, where it currently holds a market share of approximately 11%. Vertical software revenue grew 3% year-over-year due to an increase in recurring revenue growth offset by a decrease in non-recurring revenues in priority verticals.
It continues to gain market share in the micro and small business (MSMB) market. Financial services revenue increased 10.6% due to active client growth and higher monetization. In the second quarter alone, the company’s MSMB payments client base grew by 30% year-over-year, and the MSMB take rate increased by 7 basis points.
Based on the strong trajectory of results demonstrated through the year’s first half, StoneCo Ltd. (NASDAQ:STNE) is set to achieve its long-term goals.
Ave Maria World Equity Fund stated the following regarding StoneCo Ltd. (NASDAQ:STNE) in its fourth quarter 2023 investor letter:
“StoneCo Ltd. (NASDAQ:STNE) provides solutions that enable merchants and integrated partners to conduct electronic commerce seamlessly across in-store, online, and mobile channels in Brazil. StoneCo has faced near-term operational challenges because of the pandemic and high levels of inflation in Brazil. The company appears to be moving past these challenges and it appears that the successful integration of the newly acquired software business with its payments business will drive substantial shareholder value longer term.”
Overall STNE ranks 2nd on our list of the cheap technology stocks to buy right now. While we acknowledge the potential of STNE as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than STNE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.