StoneCo stock is coming off a difficult run, with the share price down 76.9% over the past five years, yet the current valuation checks still point to a company that screens cheap on several measures. That gap between weak long term returns and a strong value profile is what many investors are now trying to make sense of.

• The share price decline of 76.9% over five years shows that long term holders have taken a substantial hit, which often leaves the market cautious about assigning a higher valuation.
• StoneCo's ability to grow its payments and financial services platform can support sentiment on the stock, while any pressure on profitability or credit quality may weigh heavily on how much investors are willing to pay.
• On Simply Wall St's checks, StoneCo screens as undervalued in 5 of 6 areas, which means the broader valuation workup leans cheap rather than expensive, and suggests the market may be pricing in a lot of caution around the business (value score of 5).

The issue now is whether the current price of StoneCo already reflects the long term risks, or if the market is still overly pessimistic about the stock's intrinsic worth.

Is StoneCo Still Cheap on Earnings?

The P/E ratio suits StoneCo because earnings are a key driver for how investors frame this payments and financial services business. StoneCo currently trades at a P/E of 3.3x, compared with an industry average of about 18.0x for diversified financial companies and a peer group average of 20.3x. On those simple comparisons, the stock changes hands at a substantial discount to both the wider sector and closer peers.

A more tailored check that blends StoneCo's growth profile, margins, size and risk points to a fair P/E ratio of around 10.9x. Against that yardstick, the current 3.3x multiple implies the market is applying a heavy discount to the company, even after allowing for sector specific risks. For investors, this gap suggests the market price is building in a cautious view of StoneCo's earnings power relative to what this framework implies.

On the P/E multiple, StoneCo stock screens as undervalued relative to both peers and the fair ratio benchmark.

The StoneCo Narrative: What Would Justify Today's Price?

Simply Wall St Narratives pick up where the valuation puzzle for StoneCo leaves off by spelling out which assumptions on growth, margins and earnings would need to hold for the stock to be worth materially more or less than today’s price, and how that compares to what is currently implied. Each Narrative presents StoneCo's fair value as a thesis that can be watched over time, rather than a single static estimate.

Community views on StoneCo are split between investors leaning into the value story and others focused on the risk that recent headwinds persist.

Bull case: 41% undervalued

"Focused divestment of capital-intensive software assets has freed up substantial capital (about 25% of market capitalization), enabling StoneCo to redeploy resources to higher-growth, higher-margin financial services and to return excess capital via share buybacks..."

Bear case: roughly fairly valued

"Accelerating adoption of Central Bank Digital Currencies in Brazil could severely undermine StoneCo's transaction volumes and core payment revenues, as these government-backed digital alternatives disintermediate third-party providers and potentially render large parts of StoneCo's network obsolete, jeopardizing future top-line growth..."

Do you think there's more to the story for StoneCo? Head over to our Community to see what others are saying!

The Bottom Line

StoneCo still screens as undervalued on earnings, with the current P/E well below both peers and a tailored fair multiple. The broader valuation checks lean supportive, which suggests the discount is more about concerns on earnings resilience and business risk than pure price. For you, the key question is whether StoneCo can sustain and monetize its payments and financial services platform without fresh setbacks. The crux of the bull versus bear debate is whether this discount is compensation for real, ongoing risks or an opportunity if those risks ease over time.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.