After Strong Q2, PagSeguro Stock Still Looks Cheap

seekingalpha08-21

Some LatAm fintechs offer growth potential with cheap valuations, such as Nu Holdings, but alternatives like PagSeguro have more attractive valuations.PagSeguro's Q2 earnings show strong momentum with...

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href=https://seekingalpha.com/article/4716090-after-strong-q2-pagseguro-stock-still-looks-cheap><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Some LatAm fintechs offer growth potential with cheap valuations, such as Nu Holdings, but alternatives like PagSeguro have more attractive valuations.PagSeguro's Q2 earnings show strong momentum with...</p>\n\n<a href=\"https://seekingalpha.com/article/4716090-after-strong-q2-pagseguro-stock-still-looks-cheap\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0971096721.USD","symbol_name":"富达环球金融服务 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upside for investors.   Marcio Binow Da Silva/iStock via Getty Images Some LatAm fintechs are attracting the attention of investors because they combine growth potential with a cheap valuation. One example of this is Nu Holdings (NU), but as I mentioned in a recent article, its valuation has already become premium. However, there are other alternatives that still have more attractive valuations and similar characteristics. This is the case of PagSeguro (NYSE:PAGS), a Brazilian fintech (in the payments and banking sector) that is trading at a forward P/E of 11.2x. Although like Nu Holdings it also delivers accelerated growth and good prospects, this cheap valuation comes with a catch. PagSeguro doesn't have nearly as many moats or quality operations as Nu Holdings, which makes the thesis more risky and balances out the relationship between risk and return. Even so, if investors are aware that they are giving up quality and exposing themselves to a riskier thesis, PagSeguro seems to make sense and is undervalued after good Q2 earnings. PagSeguro’s Q2 Earnings Overview In Q2 earnings PagSeguro showed strong momentum, delivering all-time highs in several indicators. Revenue reached R$4.6bn, a growth of 19% YoY and above estimates that expected something closer to R$4.36bn. This strong revenue growth was enabled by good operational indicators, such as the addition of 500,000 active clients since Q1 2024, an all-time high in total deposits which reached R$34.2bn, as well as TPV and Cash-in (also ATH) which reached R$124bn and R$76.4bn respectively in the quarter. This increase in cash-in and active clients is also a reflection of the stimulus given to the principality. It is noteworthy that TPV increased by 34% YoY even with a 5% reduction in active merchants, given that TPV per active merchant increased by 42%. Management attributes this success to the growth of MSMBs and LMECs through the strategy of attracting merchants with the potential for monetization with the financial services that PagSeguro offers.   PagSeguro’s Q2 Presentation The Credit Portfolio also presented very robust indicators, reaching R$2.9bn with 69% being Payroll Loans, 24% Credit Cards and 7% Working Capital. Even with this increase, the NPL90 decreased to 3.2%, an already healthy level and below that of the Brazilian national financial system   PagSeguro’s Q2 Presentation All in all, this result demonstrates the ability of operational indicators to advance, such as user engagement bringing higher TPV, Cash-in, and even credit portfolio, which allow for greater gains in scale, reduction in funding costs (along with the triple-A rating by S&P Global (SPGI)) and consequently, higher net income. To illustrate this, Net Income (GAAP) was R$504 million, up 31% against Q2 2023. Diluted EPS reached R$1.56 this quarter, both all-time highs. As a result, the guidance for 2024 has not only become more feasible but has also been revised upwards by management. Now, TPV is expected to be between R$480 and R$505bn and Net Income between R$2.1bn and R$2.2bn. If the company reaches the bottom of the guidance, we would already have a P/E of ~12.1x for 2024.   PagSeguro’s Q2 Presentation In the medium term, the outlook remains positive, with the consensus expecting revenue to increase by 9% in 2025 and 2026, and EPS to increase at a faster pace, by 16% and 12% respectively. Risks That Complicate PagSeguro's Investment Thesis Although the Q2 earnings reinforce that the company is gradually proving itself, achieving better operational and financial indicators, the thesis is still not shielded from relevant risks. Brazil's macroeconomic risk must be highlighted. With fiscal risks and distant prospects for dynamic inflation, some analysts are betting on further increases in the Brazilian interest rate (Selic). This could not only bring greater volatility to PagSeguro stocks, but depending on the scenario that unfolds, it could restrict the economy in the medium term and affect its operations. Exchange rate risk is also relevant. PagSeguro's presentations and main indicators are in Brazilian Real, as this is the main currency to which the company is exposed, and in the last 12m, the BRL has depreciated by 9.3% against the US Dollar. The Brazilian Central Bank's expectations are for a relatively stable currency over the next few years. In my opinion, the main risk of the thesis lies in competition. Technological evolution has made it easier to offer a range of banking and payment services, with a number of companies in this segment emerging, evolving, and consolidating. One of the bad examples of this competitive scenario is Cielo (OTCPK:CIOXY), which used to be the leader in the acquirer segment but lost that leadership in 2023 with the huge increase in competition and the emergence of new entrants. The consequence of this was stagnant revenue and a reduction in margins, and consequently, a lower net profit that contaminated the prospects of a company that used to be the market leader and had clearer growth.   Koyfin PagSeguro is already a large company with an interesting volume of clients, but it is not fully consolidated. For this reason, it is not shielded from this risk, even if it still manages to keep some customers, if the competitive environment becomes even worse, it may lose margin by having to apply better conditions to keep its customers and win new ones. This also makes it necessary to continue to innovate and improve its services, encouraging more and more active customers. In short, you need to bear in mind that despite being a good and profitable company, this is a complex sector and requires close monitoring. Valuation: The Strongest Aspect of the PagSeguro Thesis Certainly, the best part of the thesis is the valuation. PagSeguro shares, even after advancing 60% in the last 12 months, are still trading at a very attractive level. Its forward price-to-earnings is at 11.2x, deservedly below Nu Holdings, also below Inter (INTR), and in line with its peer StoneCo (STNE). This level is also far removed from its own average over the last 5 years, which is a multiple of 23.6x.   Koyfin Although I consider this level to be cheap, I don't think it's plausible to expect a strong multiple expansion here. Given the strong competitive environment, thesis risks, and country risk, it's much more reasonable for the company to negotiate for something between 11x and 15x earnings than something above 20x, even with interesting growth to be captured. In a DCF Model, it is also possible to find value in PagSeguro Stocks even with conservative assumptions. For revenue, I considered Wall Street's forecast for the next 5 years, which is growth of around 6% per year on average, while net margin reaches 12.72% at the terminal stage. To compensate for the higher risk and the high interest rates in Brazil, I assigned a discount rate of 14% and a terminal growth rate of 5% (just above inflation). These assumptions give us a fair price of $15.81 for PAGS stocks, i.e. an undervaluation of 8%. AlphaSpread As seen in the Q2 Earnings section, the company may surprise positively in terms of growth, and if it continues to make progress in these operational indicators, with an improvement in the Brazilian macroeconomic scenario it should be able to achieve better margins. All of this ends up becoming a margin of safety for the thesis, since it is not necessary for PagSeguro to achieve high growth or margins (nor low discount rates) to be able to generate shareholder value. Final Thoughts In view of the information above, PagSeguro appears to be a Brazilian fintech that has interesting indicators, a potential to be exploited through its already high customer base, and a valuation attractive enough to justify the risks of the thesis.  These risks are not trivial and should be closely monitored, not only the risks external to the company, such as macroeconomic and exchange rate risks, but also factors such as the growth of active customers, customer loyalty, and other metrics related to profitability, which are crucial in a sector where there is a challenging competitive environment.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2461814774"}