PagSeguro Wants To Jump On The Square-PayPal Bandwagon (NYSE:PAGS)


PagSeguro (PAGS) has shown significant resiliency during the pandemic, and it’s now possible to evaluate the company based on its future potential. On one hand, loans and credit business segment is struggling, and will likely struggle for quite a while. On the other hand, PagSeguro is riding the wave of innovation and digital transformation brought about by lockdowns and stay-at-home order. PagSeguro’s PagBank business segment is posting very high growth rates. Looking at similar business models such as Square’s (SQ) and PayPal’s (PYPL), and discounting the risks, this stock should have room to grow.

PagSeguro Stock PAGS


What does the company do?

PagSeguro is an end-to-end digital banking ecosystem that enables merchants to accept payments and manage their businesses. PagSeguro offers “simple, mobile-first solutions for merchants to accept payments and manage their cash through their free PagBank digital accounts, without the need for a traditional bank account”.

PagSeguro Business Model


Right At The Turning Point

PagSeguro wasn’t immune to the pandemic, the business suffered and its financial income segment, such as loans and credit fees, declined 7.6% in Q2. Similarly to Square’s strategy, the company has taken steps to limit the damages and slowed down credit originations over the past few months. However, PagSeguro’s main customer segment is small-medium businesses, and these businesses are the most severely affected by the pandemic. As a result, PagSeguro total credit portfolio (i.e. loans and credit cards) TPV was down 6% compared to Q1. The real hit to the overall revenue was driven by a decrease in credit products consumption. Brazilians have significantly reduced their reliance on credit (e.g. installments) for their purchases, a significant money-making line of business for PagSeguro. Consequently, overall revenues were also down 2.3% YoY.

Exciting prospects can be found looking at the PagBank business segment of the company. I believe this segment will become more and more relevant for the company, in the same way that Cash App is becoming more relevant for Square’s business or Venmo for PayPal’s. Growth numbers at least point in this direction. In the first half of 2020, PagBank achieved 105% YoY revenue growth. Currently, it represents 7% of total revenue and income, and management has set the share target to 30% income in five years. Should the shift in consumer behavior towards digital payment continue past the pandemic spike, this target is very attainable. User numbers are very encouraging as well. PagBank’s digital accounts reached 4.9 million users in Q2, adding a record of 1.2 million new PagBank users.

Heading into Q3, early data indicates that PagSeguro could be about to turn the corner and put the pandemic in the past. The company achieved record POS sales in July and daily TPV record in August, and New net merchants add hit 250k over the first 50 days of Q3, on track to fly-by the 300k, 305k net new adds registered last quarter and in Q3 last year respectively. Lower credit and installment transactions will continue to impact profits and margins negatively, and it is unclear if and when these products will pick up their pace again. Once the pandemic damage is quantified and the dust settles, an economic downturn is plausible in Brazil. Should that be the case, PagSeguro credit portfolio will keep suffering over the long term. On the other hand, the current hostile environment has shown that PagBank could be able to carry the weaker business segments on its shoulders for the near future and beyond.

Wirecard MOIP acquisition & TikTok Strategic Partnership

In Q2, PagSeguro announced Wirecard MOIP acquisition. Wirecard’s (OTCPK:WRCDF) name could be fresh in your memory for the accounting scandal that saw as much as $2 billion disappear. Wirecard MOIP was the Brazilian arm of Wirecard, which has also recently sold its UK business to Railsbank, a start-up sponsored by Visa (V). The terms of the deal have not been disclosed, but the scandal should have led to favorable conditions for PagSeguro, which should have been able to grab this at a discount.

PagSeguro faz acordo para comprar Wirecard Brasil - Money Invest


Wirecard MOIP provides end-to-end payment processing for e-commerce, and the acquisition is aimed at accelerating growth in PagSeguro online sales. Wirecard MOIP is an EBITDA positive, growing company (CAGR 40% in last 5 years) with 200,000 clients. Looking at the industry numbers in Brazil, Wirecard MOIP acquisition constitutes a long-term bet that has great ROI potential over the long term. Online sales in Brazil amounts to only 4% penetration of the total retail sales. In the US and around the world, we have experienced an incredible increase in online sales as a consequence of the pandemic. Shopify (SHOP) numbers are a clear example of the magnitude of this phenomenon, and a trend reversal in this is very unlikely due to the new ‘digital first’ strategies that companies are establishing. Acquiring Wirecard and with PagBank already in place, PagSeguro is capturing a big slice of a pie that is getting much bigger.

On a customer funnel point of view, the partnership with TikTok is very interesting. PagSeguro is marketing PagBank to the younger generation, heavy users of the social media platform, hoping to acquire customers at the very start of their financial lives. A very long-term play indeed, but we know from Cash App and Venmo that this is a winning strategy. The younger generations have been the first users of digital wallets due to the social aspect of the platform, but they also contribute significantly to bring the older generations (i.e., parents) to the platform. This bet has great potential for customer acquisitions.

Challenges – Country Risk

The biggest risk for the company comes from a possible recession hitting Brazil. The “coronavoucher” relief is set to raise the Brazilians’ debt burden, and the Brazilian government could decide to consider changes in tax rates to cover budgetary shortfalls.

In April 2020, S&P reaffirmed BB- rating for Brazil with outlook stable. On the other hand, Fitch annotated a negative outlook to their BB- rating, and reported that COVID-19 and the drop in commodity prices will weaken economic growth in Latin America substantially for the year. An additional downgrade or deteriorating macroeconomic could harm PagSeguro stock price as investors are forced to reduce their risk exposure. Moreover, PagSeguro heavily depends on consumer discretionary spending. Should the economy enter a severe recession following the pandemic, customers could reduce their overall spending and significantly impair PagSeguro’s volume growth.

PagSeguro Valuation and Price Analysis

Despite sharing the secular trends of its American peers PayPal and Square, PagSeguro stock is not even close to the same levels of appreciation.

Source: Yahoo Finance

Interestingly, Brazilian competitor StoneCo (STNE) is following the same trajectory of PagSeguro, a substantial 60% gap to their American counterparties that can be attributed to investor’s perception of country risk, international potential, brand recognition and PagSeguro slower overall revenue growth. PagSeguro stock is also relatively expensive with a P/S of 19, compared to peers Square, 12 and PayPal, 13.

Source: FinViz

The bull run started at the market bottom in March seems to show signs of consolidation, offering an opportunity for investors willing to buy into the growth story. The strong support level at 35$ provides instead a more conservative target entry.

Conclusion & Takeaway

PagSeguro is delivering growth in important digital segments, and maintains great potential in the shift to digitalization that is occurring worldwide. Wirecard MOIP acquisition, coupled with smart partnerships (i.e. TikTok) will help deliver even more growth in the long term. Current and future developments in the Brazilian economy constitute the biggest risk for PagSeguro, due to its strong connection with discretionary spending and the use of credit products. High-risk tolerant investors could use the recent pull-back to initiate a dollar-cost averaging strategy, while more conservative investors may wait for the stronger support level or encouraging economic data from the Brazilian economy.

Author’s Note: If you found this article of value and want to receive updates on this research, just click the “follow” button near the title. I would love to hear your opinion, leave a comment in the section below!

Disclosure: I am/we are long SQ, PYPL, SHOP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: According to TipRanks, my success rate to date is 91%. This pick could very well fall within the remaining 9%. All articles are my opinion, they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional before investing or trading.

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