PagSeguro Digital Limited (PAGS) A Bull Case Thesis

We saw a bull thesis on PagSeguro Digital Limited (PAGS) on ValueInvestorsClub authored by spk1179. VIC is our preferred site because the ideas there are generally posted by aspiring analysts who try to find holes in their own story. We find the ideas presented on the site well thought out and worthy of a read. Click here for the full article. Below we summarized the PAGS bull thesis.

PagSeguro Digital (PAGS) is Sao Paulo, Brazil-headquartered online or mobile payment-based e-commerce company serving commercial operations. Its parent company Universo Online, as per Ibope Nielsen Online, is Brazil’s largest internet portal. PAGS intermediates payment between buyers and sellers by offering a billing option via email for traders, who do not have a site or well-structured e-commerce set up. Its agreements with several banking institutions offers buyers over 25 payment methods and ensure zero fraud in the operation. The fintech company has over 50 million unique visitors and 6.7 billion page views monthly.

While the incumbent large fintech names have been rewarded by the market for their growing digital penetration in 2020, PAGS has not experienced the same appreciation yet.

The analyst believes that is about to change as the payment sector is presently well-supported by several secular positive factors. Some of these include e-commerce growth, expansion in the cash-to-card conversion, and increased consumer adoption of digital financial services. The eventual recovery of consumer spending from the pandemic will be a cyclical positive. Other factors include:

  • One of the very first major supporting factors for PAGS came when Brazil’s Central Bank opened up the market for healthy competition giving the smaller fintech players the opportunity to ramp up their business. The largest incumbents were caught napping in complacency while smaller peers like PAGS started gaining market share.
  • However, e-commerce still contributes only about 5% of the total sales in the country, and hence has a lot of room for growth compared with 20% or higher in the US, the UK, and China. Additionally, Brazil’s card penetration at 34% is also below the US at 45% and UK around 70%.
  • The population out of the financial inclusion in Brazil is also much higher (50-60 million vs total population of 210 million) than the US.
  • PAGS’ neobank launched in 2019 is a game changer. The neobanks are known to tap lower-income small vendors giving them better experience of simpler app, lower charges, and greater rewards.

PAGS is selling at the higher end of its historic wide PE range of 20x-40x but the market seems to have missed the inherent growth prospects. The company looks poised to sustained 35-40% growth in the near term, and the analyst has given three different scenarios for the PAGS stock.

Base case $72 (+28%)

Bull case $117 (+108%)

Bear case $38 (-31%)