PagSeguro Stock: Bullish On Brazil Digital Banking Momentum (NYSE:PAGS) & More News Here – Upjobsnews

PagSeguro Digital Ltd (NYSE:PAGS) is a fintech leader in Brazil benefiting from strong momentum in its digital banking platform and payments solutions. The company just reported its latest quarterly result which capped off an impressive 2021 despite pandemic disruptions.

To get a sense of the trends, the company’s banking unit added an average of 24k new accounts per workday last year driving the total payments volume to nearly double from 2020. While shares have been highly volatile amid the market selloff, we are bullish on PAGS which is supported by solid fundamentals and a positive long-term outlook. The company is profitable and a good way to capture exposure to the high-growth opportunity of digital financial services in the Brazilian economy.

PAGS Earnings Recap

The company reported its Q4 earnings on March 22nd with non-GAAP EPS of BRL 1.28, representing approximately $0.26 at a current exchange rate of BRL 5 per USD. Revenue of BRL 3.2 billion, or ~$640 million, climbed 55.0% year over year. The adjusted EBITDA at BRL 751 million increased by 3.4% y/y reflecting a softer margin considering investments and selling expenses related to client acquisition. Nevertheless, for the full year, total payments volume (TPV) at BRL 456 billion was 97% higher than 2020 while total revenue increased by 53% to BRL 10.4 billion. 2021 EPS at BRL 4.68 climbed 12% y/y.

A key point here is that the company has two key operating segments between “PagSeguro” which is the core payments and merchant point of sale solutions operation that currently represents 90% of total revenues. PagSeguro TPV climbed 56% y/y supporting a 53% increase in segment revenue.

On the other hand, what is likely more exciting is the traction in the “PagBank” group which is based on a free digital banking account. PagBank offers consumers tools like bill payments, wires, and peer-to-peer transfers. Merchants on the platform get access to cash advances on receivables as a major selling point. PagBank TPV climbed 191% y/y driving a 63% increase in revenue in 2021. The number of PagBank active clients at 13.1 million, climbed 66% y/y with the company noting that PagBank is the main bank for nearly 50% of users.

An important metric for the company is its net take rate which reflects the monetizable percentage of the TPV. For the PagBank segment, the net take rate reached 1.44%, up from 1.35% in 2020. A priority for the company in 2022 is to move “upmarket” by targeting larger small businesses. PagSeguro also intends to expand its collateralized credit offerings which can work to add profitability.

In terms of the guidance, the management highlighted that trends have been strong this year with data through February. For Q1, the company expects to generate total revenue growth between 60% and 64% compared to the period last year. The Q1 non-GAAP net income estimate midpoint of BRL 365 million, if confirmed, would represent an increase of 12% from BRL 327 million in Q1 2021. For the full year 2022, while management is not providing specific targets, the messaging is for continued momentum and firming margins by focusing on operational efficiencies.

Finally, the company ended the year with BRL 1.8 billion in cash and equivalents against BRL 1 billion in debt. We view the net cash position on the balance sheet and otherwise solid liquidity as a strong point in the company’s investment profile.

Is PAGS A Good Long-Term Investment?

From a high level, the most favorable dynamic for PagSeguro is its consolidating market position in Brazil, a country with a population of over 200 million people. A growing middle class with expanding access to mobile internet in what remains underpenetrated banking sector represents a strong fundamental tailwind.

It’s telling that the iShares MSCI Brazil ETF (EWZ) has gained momentum in 2022, climbing by more than 30% this year already compared to a 6% decline in the S&P 500 (SPY). There is positive momentum in the economy this year amid the current macro environment defined by strong commodity pricing across energy and materials. The setup is positive for economic activity in the region which is also reflected in a strengthening Brazilian Real currency. The point here is to say that PagSeguro benefits from these trends which support a positive operating backdrop.

Going back to the strong user growth observed in the digital bank and core payments platform, the trends support a runway for growth considering all the ancillary revenue and cross-selling opportunities. A user may sign up for the free online checking account but later add on services. On this point, PagSeguro’s “PagInvest” trading and brokerage platform gained momentum in 2021 and highlights the different directions the company can take to monetize users by providing a valuable service within the ecosystem. We believe this strategy can work.

While PAGS is not the only player among Brazilian fintech, its distinction is that the company is the most profitable within the payments segment compared to Cielo SA (OTCPK:CIOXY) and StoneCo Ltd (STNE) in terms of its net income yield on TPV. The company also highlights how it’s still smaller than the established traditional banks like Bradesco SA (BBD) and Itau Unibanco Holding SA (ITUB) in terms of the average revenue per user. The upside here is the potential that this metric converges higher over time generating significant growth as it expands with more financial services.

According to consensus estimates, the market forecast is for PAGS revenue to climb 33% in 2022 while maintaining momentum with a 24% increase in 2023 and 23% in 2024. Earnings are also expected to accelerate over the next 2 years. We see up upside to these estimates which may prove to be conservative as part of the bullish case for the stock. Considering the current 2022 EPS estimate of $1.04, PAGS is trading at a forward P/E of around 19x at the current market price.

We mentioned the other Brazilian fintech players like StoneCo Ltd (STNE) and Nu Holdings Ltd (NU). PAGS stands out as trading at a lower revenue multiple to both names and a discount in terms of the forward P/E ratio. Recognizing each of these companies have their differences and focus on varying segment, we view PAGS as offering a better value among the group while still strong growth.

PAGS Stock Price Forecast

Shares of PAGS have been in a deep selloff since last October when it was trading as high as $60. At the time, there was an unrelated headline-making “short report” on the maker of the point-of-sale terminals PAGS commercializes. The selloff sort of gained momentum following a weaker than expected Q3 report in November when PAGS management guided for softer margins. The trend lower in recent months now coincides with the broader market weakness among “high growth tech names”.

Our take is that the latest quarterly report was strong enough to give shares of PAGS a new sense of momentum. Notably, the stock currently trading around $20 is still near the lowest level going back to the pandemic crash of 2020. It’s fair to say that the fall from the high has already priced in some of the weaknesses and worst-case scenarios. The way we are looking at PAGS is that the current level represents an attractive entry point for a high-quality company at a discount. From here, we believe the combination of an attractive valuation and a more positive outlook can send shares higher.

Is PAGS A Buy, Sell, Or Hold?

We rate PAGS as a buy with a price target for the year ahead at $26.00 representing a 25x multiple on the current consensus 2022 EPS of $1.04. Our thinking here is that the company’s valuation premium can converge higher towards peers like StoneCo and Nu Holdings, which technically have higher growth although PAGS benefits from stronger financials. We are bullish on the Brazilian economy which should help PAGS outperform expectations.

In terms of risks, the next few quarters will be critical to confirm the operating momentum and financial trends. Weaker than expected results or deterioration to the macro outlook can open to door for more downside in the stock through a revision in the long-term earnings outlook. Monitoring points going forward include the trends in client growth and the net take rate.

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