StoneCo Q2: Weak Core, Credit Risk Rising

What happened

StoneCo's Q2 revenue growth decelerated to just 2.5% year-over-year with an EPS miss, signaling weak core payments momentum and an increasing reliance on credit products to sustain top-line growth. The company is pivoting toward credit originations, but rising delinquencies suggest deteriorating asset quality and potential future charge-offs that management may be understating. High Brazilian interest rates, competitive pressure from low-cost Pix rails and rivals like PagSeguro and Mercado Pago, and a challenging macro environment are squeezing take rates and profitability. The latest filing had highlighted improving 1H25 profitability and active capital allocation, but this Q2 print reverses that momentum and exposes the cost of chasing low-quality growth. The result raises doubts about the durability of cross-sell and software bundling as offsets if credit risk is not tightly contained.

Implication

The pivot to credit to offset slowing payments growth risks creating a larger balance-sheet overhang if delinquencies continue to rise in Brazil's high-interest environment. Management's previous narrative emphasized cross-selling into Linx and upmarket clients, but Q2 data suggest that strategy is not yet generating enough organic growth to avoid reliance on lower-quality credit revenue. Competition from Pix and larger fintechs will likely keep take rates under pressure, limiting margin expansion even if credit performance stabilizes. Investors should monitor NPL formation, coverage ratios, and the trajectory of software/payments attach before assigning a premium multiple. Until management demonstrates that credit growth is disciplined and non-credit revenue reaccelerates, a cautious stance with a bias to trim positions on any rebound is warranted.

Thesis delta

The thesis shifts from a constructive watch to a more cautious, credit-quality-focused stance. The prior expectation of improving profitability and software-led monetization is undercut by decelerating core revenue and rising delinquencies, indicating management may be sacrificing quality for growth. We now require evidence of tightening credit standards, stabilizing NPLs, and a return to organic non-credit growth before restoring a positive bias.