Investidea: Digital Insurance, because the economy is not important

Инвестидея: PagSeguro Digital, потому что экономика не важна

Today we have a speculative idea: take shares of the fintech company PagSeguro Digital (NYSE: PAGS), to cash in on the rebound after they fall.

Growth potential and duration: 21,5% for 16 months; 64% for 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 suggested by our reader Maxim Ivanoff in the comments to the investment idea for Covestro. Suggest your ideas in the comments.

When creating the material, sources were used, inaccessible to users from the Russian Federation. Hopefully, 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 are we writing, Are forecasts and hypotheses, not a call to action. It is up to you to rely on our thoughts or not..

And what about the author's predictions

Research, for example 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 perform better than people, but alas, they work worse.

Therefore, we do not try to build complex models.. The profit forecast in the article is the author's expectations. We indicate this forecast as a guideline. As with the investment in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.

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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, and legal entities. According to the company's annual report, its proceeds are divided as follows.

Transactions and other services — 66,16%. Commissions, collected by the company for using its services.

Finance income — 31,95%. By and large, this is factoring: the company gives sellers most of that, what clients owe them at once for a modest percentage. Otherwise, the seller will receive the money much later.: payments take a long time.

  If you weed out all unnecessary, the code will remain

Other financial income — 1,89%. Then, what the company earns from deposits.

The company operates only in Brazil so far..

Инвестидея: PagSeguro Digital, потому что экономика не важна

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 cause. American investors usually do not know much about the business of foreign companies and often sell their shares, based on macroeconomic statistics from countries, where do these promotions come from. “Well, in Brazil, things seem to be not very good., probably, and PagSeguro has problems ". But the company is not very dependent on the economic situation in Brazil..

In Brazil, regulators are in debate on lowering the maximum percentage, which fintech companies can charge from prepaid cards. This is the most negative news.: if such a restriction is introduced, then the company can lose about 4% proceeds. But although it is unpleasant, but not terrible.

So the company's stock could bounce: such a strong drop in stocks cannot be justified by the problems listed above. But there are also reasons for business growth and quotes..

Yesterday, 11 November, the report for 3 neighborhood 2021, significantly smoothed out the negative impression from the previous report: compared with 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, whatever tactical moments interfere with PagSeguro, fintech has excellent long-term prospects in Brazil.

Rapid introduction of digital payments allows the Brazilian state to increase tax collection. Actually, in Brazilian reals, the company's profit and revenue growth looks very brave, because in this country the state has created generally favorable conditions for digitalization of payments. And moreover, that cash still accounts for 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 increasing. Also in Brazil, the growth rates of bank loans are increasing, this can be considered an indirect sign of growth in activity with payments in principle. I think, the next year, the company may turn out to be quite positive and this will restore investor confidence in these shares.

  Portfolio strategies. Managed by an individual broker

Инвестидея: PagSeguro Digital, потому что экономика не важна

Инвестидея: PagSeguro Digital, потому что экономика не важна

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, until. Brazil is a third world country, where there is still a huge front of work on 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 to see revenue and profit growth for another five years. for example, in Russia, the population in terms of living standards fell back by 2011, but fintech services in our country are doing great - because in this particular niche there is still room to move.

In the case of Brazil, low consumer confidence correlates with PagSeguro's business in almost no way. There is 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, generally, not space by fintech standards. Given the high probability that, that the rate is 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 off many investors. She has a second class of shares, voting power. You guessed it, these shares are owned by one investor: more 86% Votes in PagSeguro belongs to the Brazilian Internet company Universo Online. A UO, in turn, belongs to the large Brazilian media conglomerate Grupo Folha.

Generally, 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 fraudulent reporting to selling a company at too low a price.

Still, economics is important. 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.

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Do 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 it is 11,8%. Actually, the company's total margin has been steadily declining over the past few years.

Sure, it's all to blame for PagSeguro's high costs of expanding its 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%, and with fast-growing startups like Stone - 8%. The main problem here is, what is PagSeguro, most likely, will have to buy smaller startups for obscenely big money, Is a classic problem of large fintech, with such, eg, collides PayPal.

Brazil. The company conducts its business in a developing third world country, and there anything can always happen to her. You need to understand and accept this.

What is the bottom line

You can take shares now by 36,6 $. And then there are several options.:

  1. wait, when will the shares start to cost 44,5 $. I think, we will reach this level in the next 16 months;
  2. wait, when will the stock be worth again 60 $. It's worth getting ready to wait here 5 years. Even if investors don't buy into the company's high growth rates, we are counting on, then, for sure, during this time, an economic boom will begin in Brazil, and investors will rush to buy shares of the "promising Brazilian fintech service".

This idea, however, volatile - largely due to the Brazilian registration, so don't come close to these promotions, if you are not ready to endure a drop in their value.

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