Today we have a speculative idea: take shares of the fintech company PagSeguro Digital (NYSE: PAGS), to capitalize on the rebound after they fall.
Growth potential and validity: 21,5% behind 16 Months; 64% behind 5 years.
Why stocks can go up: stocks fell too much.
How do we act: we take shares now by 36,6 $.
This idea was proposed by our reader Maxim Ivanoff in the comments to the Covestro investment idea.. Suggest your ideas in the comments.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
PagSeguro is a fintech ecosystem. Merchants make online payments through its platform, sell goods and services, also PagSeguro provides digital banking services to individual users, as well as legal entities. According to the company's annual report, her earnings are divided as follows.
Transactions and other services — 66,16%. Commissions, collected by the company for the use of its services.
financial income — 31,95%. Basically, it's factoring.: the company gives sellers most of that, what clients owe them immediately for a modest percentage. Otherwise, the seller will receive the money much later: payments take a long time.
Other financial income — 1,89%. That, what the company earns from deposits.
The company operates only in Brazil so far..
Arguments in favor of the company
Fell down. Since August, shares have fallen in price since 60 to 33,44 $. Such a strong drop was caused by the negative in the company's report for 2 neighborhood 2021.
The growth rate of active users has fallen. In my opinion, it does not matter, because the volume of payments on the company's platform is growing - and this is most important.
Rising inflation in Brazil is a significant reason. American investors usually do not really understand the business of foreign companies and often sell off their shares., based on macroeconomic statistics from countries, where do these promotions come from. “Well, in Brazil, things don’t seem to be very good., I guess, and PagSeguro has problems". But the company is not strongly dependent on the economic situation in Brazil..
In Brazil, regulators are in debate on lowering the maximum percentage, which fintech companies can take from prepaid cards. This is the most negative news.: if such a restriction is introduced, then the company can lose about 4% proceeds. But even though it's annoying, but not terrible.
So the company's stock could bounce: such a strong drop in shares cannot be justified by the problems listed above. But there are also reasons for the growth of business and quotes.
Yesterday, 11 november, the report for 3 neighborhood 2021, significantly mitigated the negative impression from the previous report: compared to 3 quarter 2020 revenue increased by 55,8%, and profit - by 22,1%.
Grasp reflex. The main argument in favor of this business was expressed in the work of Charles Tilly "Capital, Coercion and European States": all states seek to expand their tax base. So that, no matter what tactical moments hinder PagSeguro, the long-term outlook for fintech in brazil is excellent.
Rapid introduction of digital payments allows the Brazilian state to increase tax collection. Actually, in brazilian reais, the company's profit and revenue growth looks very bravo, because in this country the state has created generally favorable conditions for the digitalization of payments. And besides this, that cash still makes up more than a third of all payments in the country.
Season. Despite the fact that Brazil's industrial and GDP growth rates are falling, the service sector is doing great: business conditions are improving and employment is growing. Also in Brazil, growth rates of bank loans are increasing., this can be considered an indirect sign of an increase in activity with payments in principle. Think, the next year the company may turn out to be quite positive and this will return investor confidence in these shares.
Important or not important. This may seem like a counterintuitive thesis., but by and large the economic situation in Brazil is not so important for the company. Anyway, till. Brazil is a third world country, where there is still a huge front of work on the digitalization of activity.
So the country as a whole can suffer, but specifically PagSeguro, due to the low level of technological development of this country, can hope for revenue and profit growth for another five years. For example, in Russia, the population in terms of living standards fell back to 2011, but fintech services in our country are doing great - because there is still room to move in this particular niche.
In the case of Brazil, the low level of consumer confidence correlates with PagSeguro's business in no way. No reason to count, that this will change soon.
Can buy. In absolute terms, the company is inexpensive: its capitalization is 11 billion dollars, P / E is not the smallest - 51, but, in general,, not space by the standards of fintech. Given the high probability that, that the bet on Brazilian - and wider, Latin American – fintech can play, PagSeguro could be of great interest to an investor with deep pockets. So the company may well be bought by some PayPal.
What can get in the way
Everything is not necessary. The company is registered in the Caymans - which will already scare away many investors. She has a second class of shares, voting power. How did you guess, these shares are owned by one investor: more 86% Votes in PagSeguro belongs to the Brazilian Internet company Universo Online. A UO, in its turn, belongs to the large Brazilian media conglomerate Grupo Folha.
All in all, the space for unpleasant opportunities is very large here: UO can take action, which will not be in the interests of minority shareholders like us, — from fraud with reporting to the sale of the company at too low a price.
Still, the economy matters.. The deteriorating situation in the Brazilian economy could negatively affect the perception of these stocks by US investors. Actually, already affects, as we saw above.
The fluctuations of the Brazilian real will also be affected: the cheaper it is, the less dollars in the report - and the worse the reaction of investors, even if the quarter was good.
If you love honey - love and chill. Company report for 3 the quarter showed a decrease in the company's final margin: if in 3 quarter of 2020 this figure was 14,8%, now he's composing 11,8%. Actually, The company's bottom line has been steadily declining over the past few years..
Certainly, it’s all to blame for PagSeguro’s high spending on expanding the audience and retaining existing users – this is a common story for fintech. But in general, the steady decline in the company's business margin cannot but worry. And while there are no factors, who could change it.
Brazil has four other big players in online payments, And, need to say, PagSeguro's share 7,3% not the biggest in this market. PagSeguro has to compete with both big companies like Cielo - 42,5% — и Network — 29,4%, so it is with fast-growing startups like Stone - 8%. The main problem here is, what is PagSeguro, probably, will have to buy smaller startups for obscenely big money, Is a classic problem of large fintech, with such, for example, collides PayPal.
Brazil. The company conducts its business in a developing third world country, and anything can happen to her. It needs to be understood and accepted..
What's the bottom line?
You can take shares now by 36,6 $. And then there are several options.:
- wait, when will the shares start to cost 44,5 $. Think, we will reach this level in the next 16 Months;
- wait, when will the stock be worth again 60 $. It's worth getting ready to wait here 5 years. Even if investors do not buy into the high growth rates of the company's financial performance, which we count on, then surely during this time Brazil will begin an economic boom, and investors will rush to buy shares of a “promising Brazilian fintech service”.
This idea, however, volatile - largely due to the Brazilian registration, so stay away from these promotions, if they are not ready to endure a drop in their value.
