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@girolino
Giro Lino
$10.9M follower assets
Blogger. Voracious reader, workaholic. Former HF Manager. Sign-up link for newsletter➡️ https://blog.girolino.com/cv_lpv/
7 following667 followers
Posts Recap
I write a lot of stuff, so the idea is to offer a filter to what you cannot miss. Enjoy it.
The ranking is based on unique views, free/paid new subscribers, and open rate — all relative.
### Top 5🌟
#### 30 Days
  1. MercadoLibre ($MELI)
  2. Food for Thought #16 (FED and China)
  3. Food for Thought #17 (About Stone)
  4. Stone's Biggest Moat
  5. Brazil April Wrap-Up
#### 7 Days
  1. Food for Thought #17 (About Stone)
  2. Stone's Biggest Moat
  3. $SE 1Q22: Upside Risk on Monetization
  4. $NU 1Q22: The Purple Wave
  5. Expert Interview - Sinqia

> 🌟 Top Percentile on Unique Viewers

5-min recap on what we wrote this week
--------------------------------------

Food for Thought🌟
------------------
  • Since Thursday, the market has been speculating that BTG Pactual and Stone would be negotiating an M&A.
  • What is in there for BTG Pactual? Stone is one of the top five players in the industry, with a considerable capillarity, good tech resources for scaling its operations, and top-notch logistic capabilities.
  • The market still has a high consideration for Street, so he returned and joined meetings with crucial investors — we had access to a person who joined one of those meetings and took a few notes.
  • We believe Esteves knows that his name associated with Street's would fully restore investors’ confidence in management and probably would use this to convince Street.
  • What is in there for Stone? Even though Stone isn't facing a liquidity issue, the company could use more resources to accelerate its strategy and resume its credit operation.
  • With BTG, Stone could strengthen its position as a payment gateway for merchants using BTG's capital to leverage the existing operation.
  • Also, we wrote yesterday about a new player gaining market share in the Brazilian Payment Industry that faces a new threat to market participants.
  • Stone could leverage its platform to gain stickiness with its clients by offering complex products, such as lending, insurance, investment, etc.
Keep Reading 🔽🔽🔽

Big Piece on Stone 🌟
---------------------
  • In the past years, we’ve heard that the most significant competitive advantage Stone had was its tech, though it always sounded like an empty speech.
  • Tech is important, indeed. It enables the company to expand over a smaller structure, minimizing the growth friction and improving sunk costs over time.
  • However, we see tech as an enabler, not a competitive advantage. If you had Stone’s software, you would not be able to compete against them. Stone’s most significant competitive advantage relies on distribution due to its hub strategy.
  • Stone’s strategy is looking for cities with +500k inhabitants in Brazil as a possible spot for a hub. Usually, they place ten sales representatives, three logistic employees and one leader for 100sqm rented spaces.
  • The sales team's goal evolves to increase the number of clients, lower the churn, solve daily routine problems, such as malfunctioning POS machines, and, mainly, sell pre-payment to customers.
  • Also, Stone offers to franchisees most of the back-office needed for the operation (HR, Accountancy), reducing the back-office costs for the business owner.
  • There is a substantial competitive differential having franchises in smaller locations. First, incumbents, such as Itaú (Rede), and Cielo, will never (ever) sell franchise licensing.
  • Second, franchises allow Stone to offer a last-mile solution in smaller regions. For instance, imagine you own a restaurant and operate under Cielo. It’s 12:30PM, the restaurant is full, and your POS dies.
Keep Reading 🔽🔽🔽

$SE 1Q22: Upside Risk on Monetization🌟
---------------------------------------
  • We’ll go briefly on Sea’s earnings and its highlights in this post. Then, we intend to extend to a discussion about the company’s operation in LatAm.
  • Sea Limited ($SE, “Shopee”, “Shopee Brazil”) reported 1Q22 results, largely in-line on the top line and much better than expectations on cash burn level.
  • The eCommerce segment delivers GMV growth of 39% YoY, while its cash burn also lowers QoQ. We welcome the message from management that Sea may achieve profitability sooner than expected.
  • Also, management reduced its GAAP revenue guidance to US$8.5-9.1bn from US$8.9-9.1bn reflecting the growing uncertainties in macro conditions, which could impact the spending power of consumers.
  • We believe that the guidance now implies that the GMV growth outlook for 2022 is now +30-40% YoY for the consolidated company, with LatAm growing 100% YoY.
  • Management reaffirmed that they focus on profitability over growth, which is an encouraging message. As a result, we believe Sea could deliver high double digits growth without cash burn, which, in our view, would be great.
  • The positive highlight was the monetization increase in the eCommerce operation, as the GAAP marketplace revenue as a percentage of total GMV rose to 7.2% during the quarter compared to 5.7% last year.
  • As expected, gaming faced pressure in 1Q22, with bookings down 24% QoQ. However, the company started to see the monthly user trend showing early signs of stabilization towards the end of 1Q22.
Keep Reading 🔽🔽🔽

$NU 1Q22: The Purple Wave
-------------------------
  • Nubank reported a $45mn net loss vs. the company-provided consensus of a $77mn loss. Similar NPL rises to the incumbent consumer segment, but without payroll and mortgage to smooth the hit.
  • We see the quarter with solid credit balance growth. Specifically, total loans rose 122% YoY. In addition, consumer loans, an investor focus, rose to $2bn and now represent 23% of total loans vs. 21% in 4Q21.
  • Card TPV rose to $15.9bn, up ~112% YoY and ahead of GIROe's $14.8bn. Interchange revenues increased 127%, with flattish yields at 1.19%.
  • Asset quality did not erode as most buy-side analysts expected, with 90-day NPLs up 70bps QoQ vs. Bradesco’s consumer segment’s 60bps and Itau’s 30bps, although this comparison tells only half true (keep reading).
  • While fast loan growth helps NPLs, we see Nubank’s figures as substantially better than other neobanks. Provisions rose 287% YoY, driven by loan growth. Overall, Nu presented a strong beat vs. our expectations.
  • Under IFRS9, Nubank has to front-load the recognition of credit loss provisioning whenever a loan is booked. So, the faster Nubank grows the credit book, the more short-term pressure it brings to our gross profit margin.
  • We must consider how interest on cash balance hurts the short-term PnL. As interest rates go up, Nubank earns more money on our large pool of cash balance, even if it is partially or wholly offset by higher funding expenses.
  • But it drives our revenue up and leaves our gross profit essentially unchanged. This pushes down our gross profit margin as it enlarges the denominator of the gross profit formula.
  • We ran a few tests assuming stable growth (only to offset churn) and rates at 6%-8% and found a 55%-65% range for gross profit (versus the actual 34% in the 1Q22).
Keep Reading 🔽🔽🔽

Expert Interview - Sinqia
-------------------------
  • Giro: The market had problems related to the registration of receivables, which impacted TAG (Stone), and some players, such as N26, are still having difficulty putting the PIX on the street, while others face problems related to latency or settlement. Why do you believe that players are having difficulties? Is it related to the design proposed by the regulator, or is there another reason?
  • Saldanha: Every innovation has advantages and difficulties. If you take Open Banking, why didn't it pop and Pix went? The Open Banking concept is a road that needs to be built.
  • Pix is transactional. The market was not prepared for this. It's a 24/7 model with an SLA (“Service Level Agreement”) ready for it. The banks were not ready for that. The provider may be ready, but he needs to connect it all to the legacy.
  • The bank needs one year and two more to implement to carry out a legacy structure, although they only had two years to prepare.
  • The Central Bank protected itself a lot in the regulatory environment. Of course, there was a problem with timing the distribution of Central Bank regulations, but it was always very clear and transparent about the rules.
  • In fact, he always gave options, such as indirect and direct Pix. If you don't have the conditions to perform, you can opt for indirect and pay a fee for it. Banks have been able to adapt, while others opt to switch to software.
  • Perhaps the PIX is the most sensitive topic. However, with over 12 months on the road, Pix is a huge success in P2P transactions, even if retailers are still not convinced about him.
Keep Reading 🔽🔽🔽
giro.substack.com
Expert Interview - Sinqia
Thiago Saldanha - CTO

New Post About $NU Earnings
### Highlights

Nubank reported a $45mn net loss vs. the company-provided consensus of a $77mn loss. Similar NPL rises to the incumbent consumer segment, but without payroll and mortgage to smooth the hit.

We see the quarter with solid credit balance growth. Specifically, total loans rose 122% YoY. In addition, consumer loans, an investor focus, rose to $2bn and now represent 23% of total loans vs. 21% in 4Q21.

Card TPV rose to $15.9bn, up ~112% YoY and ahead of GIROe's $14.8bn. Interchange revenues increased 127%, with flattish yields at 1.19%.

Significantly, asset quality did not erode as most buy-side analysts expected, with 90-day NPLs up 70bps QoQ vs. Bradesco’s consumer segment’s 60bps and Itau’s 30bps, although this comparison tells only half true (keep reading).

While fast loan growth helps NPLs, we see Nubank’s figures as substantially better than other neobanks. Provisions rose 287% YoY, driven by loan growth. Overall, Nu presented a strong beat vs. our expectations.

Nu presented a substantial beat to our estimates due to credit portfolio growth. According to the management:

> “We continued to see significant opportunities to grow and gain share in the unsecured credit market in Brazil, the largest available market in financial services in Latin America. Our credit portfolio, with credit cards and personal loans, grew significantly above market, at 126% YoY, to a total of U$$8.8 billion, while maintaining healthy credit levels and strong unit economics”. (David Vélez)

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Goldman Bull on $MELI
Irma, from $GS, doubles down on $MELI call. Yet, she's not updating her views on Pago. I believe she's holding it due to lower stock prices. IMO, bull.
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@alex1805/16/2022
Financially they appear to be in a very strong position, but the competitive nature of e-commerce always puts me off a bit when I look at $MELI
+ 2 comments
Will $STNE be acquired?
Yesterday, we wrote about the rumors that BTG Pactual would be negotiating to buy $STNE.

Since Thursday, the market has been speculating that BTG Pactual and Stone would be negotiating an M&A — actually, BTG Pactual would be the buyer.

$STNE's gossip began in Dec of 2021 when the company hired $JPM to assess strategic options. In the local market, however, the gossip about $STNE looking for a potential buyer since March of 2021, when the company was supposedly negotiating with $XP.

As the deal didn't prevail, $STNE turned to Inter since both have an NDA agreement, but soon the sell-off began, and the deal was down. The market spreads the news that Stone has been negotiating with BTG Pactual, even though the deal would not be close to being concluded.

➡️What is in there for BTG Pactual?
Stone is one of the top five players in the industry, with a considerable capillarity, good tech resources for scaling its operations, and top-notch logistic capabilities.

Honestly, I believe that Andre Esteves (BTG Chairman) also observes that Andre Street ($STNE Chairman) is back. After losing money in its credit operation, local investors sold their shares quickly because of $STNE's naivety in jumping the gun, especially about lending in Bz.

Nevertheless, the market still has a high consideration for Street, so he returned and joined meetings with crucial investors. We believe Esteves knows that his name associated with Street's would restore investors’ confidence in mgnt and would use this to convince Street.

➡️What is in there for Stone?
Even though Stone isn't facing a liquidity issue, the company could use more resources to accelerate its strategy and resume its credit operation.

With BTG, $STNE could strengthen its position as a payment gateway for merchants using BTG's capital to leverage the existing operation. $STNE could leverage its platform to gain stickiness with its clients by offering complex products, such as lending, insurance, etc.

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@deeboinv05/16/2022
I guess combining BTG's expertise in the credit business with Stone's capilarity and commercial strenght in BZ's SMB space would be a powerful mix for them to escalate the lending portfolio in this segment with both good pace and risk assessment. The deal would be a win-win in my view (even before considering the optionalities that would open up wiht both André's working together...)
+ 1 comment
Next Deep Dive
Hi, guys. I'm thinking about the next Deep Dive.
What company would you like to read about?
6%$XP
26%$PAGS
60%$MELI (Pago/Envios)
6%Other (comment)

15 VotesPoll ended on: 5/14/2022

$NU looks cheap
Nubank is trading an implicit internal rate of return of ~30% for the following 5yr. Many analysts are worried after BNPL reporting disastrous earnings. IMO, they don't understand the business and its PnL.

Edit
$NU's business and PnL. BNPL is a terrible business.
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New Post About $SHOP
Shopify is a company I’ve been following for a while, though I recently bought a share. I always learned a lot reading Shopify’s ERs and call transcripts.

It helped me put in context many different features companies such as MercadoLibre and Stone were launching in LatAm.

Perhaps, what is funny is that I’m using a lot of knowledge from Meli and Stone to understand what Shopify is pursuing to build.

I expect to share with readers what is occurring internally with Shopify and how the company is changing its business over time.

First, I’d like to acknowledge that communication deteriorated a lot. I don’t want to use this space to criticize Tobi, so, in short, I left my opinion on Twitter in reply to @jerrycap.
Second, the core business is preserved. I don’t understand why a deceleration in GMV growth is surprising. As we’ll see, GMV growth has been decelerating since 2017.

The Covid-19 outbreak was an extraordinary opportunity for Shopify to advance years in months, but growth would decelerate eventually.

Because of the Covid-19 outbreak, Shopify had to bring upfront a lot of different initiatives that, perhaps, the company was holding for a moment while the business was matured.

The consequence is that Shopify’s capital structure will change over time. Even though that is not bad for the business, all multiples previously used to value the company are worthless.

For instance, how would you compare Shopify’s sales multiple to Emerging SaaS providers if margins are different? Also, the gross profit multiple is worthless since most of Capex is expensed, so the operating margin is also different.

So, until investors find this new “multiple ranges” to sustain trading prices, the stock should be much more volatile.

We believe the first fundamental transformation came when Shopify transformed from essentially being perceived as what's like an online store builder into being more of an omnichannel back-end platform.

In our opinion, Shopify’s core business is offering the back-end engine behind your business in every aspect of your business.

After implementing omnichannel integrations, some merchants don't even have an online website. Still, they might be utilizing Shopify as a point of sale system (“POS”), for example, and they're just selling purely retail or brick-and-mortar (“B&M”).

Other merchants might only be selling purely through Instagram Marketplace, and they're using Shopify for inventory synchronization and order management.

Shopify has already moved from version 1.0 to 2.0. The company isn’t perceived as this front-end-focused platform, where it's a theme designer or an online website designer.

Shopify 2.0 has a holistic back-end tool for any business to manage every aspect of their commerce business, whether online or offline, across all platforms.

In the past years, in our opinion, probably the most significant milestones were the sales channel SDK and the checkout API. They said to customers, “look, we’re agnostic about where you’re selling your product.”

Obviously, Shopify has always had its own App Store regarding a third-party App Store that developers can build on their APIs and publish applications. But it was only in the past couple of years that the company started to be perceived as agnostic.

Also, the company has been doing a good job capturing low-hanging fruits quickly in initiatives such as Shopify Capital, where Shopify offers an automated loan system personalized on each seller’s business performance.

Then, obviously, have Shopify Balance (debit card), which is such a compelling offer if you rely on marketing your brand on Facebook or Google.

### The next leg…

In our view, Shopify 3.0 is marketed by high-touch products, such as Shopify Fulfillment Network, and is more aggressive on the POS roll-out.

Just as MercadoLibre in LatAm, we believe that Shopify is taking a bit more of an intentional approach with how they can expand their ecosystem from a first-party standpoint as opposed to just a third-party viewpoint.

Even though investors are worried about the business model, we understand the recent moves as a huge de-risk for its business.

For instance, MercadoLibre is perceived as a marketplace business, even though its Fintech ops became increasingly relevant to the company and today is more significant than the marketplace itself.

We believe Shopify is setting the ground and indicating to the market where they’re heading in the next 10 years. We get particularly excited about owning the payment processing experience.

Based on our experience following Meli for years, we believe that Shop Pay is the most significant catalyst for growth. Everything else around it powers that specific part of the ecosystem as a network effect.

For instance, the partnership between Shopify and Stripe. Essentially white labeling Stripe as Shopify payments has put them in an incredibly advantageous position.

They can capture a lot of the value upfront whenever a merchant utilizes Shopify Payments as a payment gateway.

Shopify 3.0 will benefit from merchants’ growth, even though they might not be using Shopify’s front-end. As for Meli, we believe Shopify will benefit dramatically from sunk cost.

### Too Soon For Conclusions

When we think about Shopify’s competitive landscape, most people remember BigCommerce, Magento, WooCommerce, Squarespace, Demnadware, VTEX, etc.

We believe all these players definitely have their unique way of marketing and definitely unique way of products they offer.

The more significant thing about Shopify is it's basically an integration/app integration-based platform. So basically, it gives you the platform for anything to get to anything and everything.

Even though Shopify does portray itself as a small business e-commerce platform, it's got a Shopify Plus version to it, technically targeting the business's enterprise side.

B&M merchants learned this lesson two years ago when they were forced to close their doors almost overnight. As a result, tens of thousands of physical retailers pivoted quickly and moved online using Shopify.

Everyone from mom-and-pops to merchants with significant operations and considerable existing sales came fully online with Shopify, which, at the time, was the only sales channel that mattered.

Now that physical retail is reopening and retail, in general, is rebalancing, this more significant position Shopify has earned merchants represents a huge opportunity.

The hundreds of thousands of businesses that shifted to Shopify during the pandemic stayed with them since they can now take advantage of their robust retail POS offering for a unified view of their sales online and offline.

Shopify has been developing a POS retail software for years, and it's now at the point where all merchants who came to Shopify during the pandemic can leverage it.

As mentioned by the management in the 4Q21, the company is growing the sales team and marketing support to help ensure that any merchant doing in-person selling on Shopify knows how much stronger the Shopify POS value proposition is (the reviews are actually fantastic).

Probably this is the first significant change in Shopify’s capital allocation that worries investors. The acquiring business is highly competitive, as we comment in previous posts.

To summarize, it’s a distribution business, which the company has to hire a robust sales team and be willing to operate under cash burn for a couple of years, at least.

We wrote explicitly about Stone a couple of times. Still, there are significant products the company is trying to develop that Shopify already owns, such as the lending and balance features.

Even though we have an estimate about the CAC for merchants, we’re not sharing it now because we still don’t understand what sort of scale or markets Shopify will explore.

However, according to our conservative estimates, we believe the business could generate an incremental 50bps over Shopify’s TPV, which should outpace the GMV due to the TPV-off platform growth.

Also [cont...]

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Nice. This is when I usually get into growth companies. After they become profitable, growth slows to 20%-40%, growth investor’s abandon, stock drops 75%, I buy a great company at 1/3 where it’s been trading for a year or two and avoid the risk of riding the river not knowing where the waterfall would come. But the waterfall always comes with these growth stocks, that’s where I find my opportunities. Just added $SHOP to my on deck watchlist last week.

Love the detailed write up!
+ 5 comments
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