Big Tech And Brazil Pressures Will Erode Margins

Key Takeaways

• Rising competition and regulatory pressures are undermining PagSeguro's customer retention, revenue per user, and growth opportunities.
  
• Economic instability and payment industry shifts are eroding profitability, increasing credit risk, and compressing margins.
  
• Expanding client base, strong banking growth, improved asset quality, effective cost management, and active capital return policies position the company for sustained profitability and value creation.

Catalysts

Engages in the provision of financial and payment solutions for consumers, individual entrepreneurs, micro-merchants, and small and medium-sized companies in Brazil and internationally.

• Intensifying digital competition from global fintechs and big tech platforms such as Apple, Google, and MercadoLibre is expected to erode PagSeguro's ability to acquire and retain customers, which will ultimately place sustained downward pressure on future transaction volumes and fee-based revenue growth.
  
• Persistent macroeconomic volatility and currency depreciation in Brazil are likely to reduce consumer purchasing power and digital payment adoption, increasing credit risk and weakening transaction growth, which may directly impact the company's topline and cause higher loan losses, damaging both revenue and net income.
  
• The accelerating adoption of government-backed instant payment rails like Brazil's Pix risks further commoditizing the payments business, driving lower transaction fees across the industry and squeezing PagSeguro's net margins and profitability over the long term.
  
• As the payment and digital banking sectors consolidate among larger, diversified, tech-first players, increased price competition and the migration of merchant payment preferences threaten PagSeguro's unique value proposition, thereby reducing revenue per user and prompting a rise in customer acquisition and retention costs that will compress operating margins.
  
• Growing regulatory scrutiny and the tightening of data and payment processing standards in Brazil and Latin America are set to increase compliance complexity and costs, slowing new product rollouts and putting further pressure on the company's ability to sustain earnings growth and expand its offering in future years.

PagSeguro Digital Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on PagSeguro Digital compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming PagSeguro Digital's revenue will grow by 3.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 11.4% today to 9.9% in 3 years time.
• The bearish analysts expect earnings to reach R$2.1 billion (and earnings per share of R$6.89) by about August 2028, down from R$2.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.9x on those 2028 earnings, down from 6.3x today. This future PE is lower than the current PE for the US Diversified Financial industry at 16.0x.
• Analysts expect the number of shares outstanding to decline by 6.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.23%, as per the Simply Wall St company report.

PagSeguro Digital Future Earnings Per Share Growth

Risks

• Continued double-digit growth in both active clients and total payment volume, along with a demonstrated ability to attract higher-value clients and successfully cross-sell banking products, suggests an expanding addressable market and rising payment volumes, which could underpin future revenue and earnings growth.
  
• The banking segment's rapid growth-now at 22% of total gross profit with robust gross margins at 70%-reflects effective product diversification and operational leverage, expanding both revenue and net margins.
  
• Sustained improvement in asset quality and disciplined underwriting have resulted in a declining non-performing loan ratio (from 4.5% to 2.3%), which reduces credit losses and supports higher profitability.
  
• Ongoing cost optimization-including a successful repricing strategy to offset interest rate hikes, reduced funding costs, and operating cost discipline-positions the company to defend or improve net margins even in a higher-rate environment.
  
• Consistent capital return strategies, such as aggressive share buybacks and the introduction of a recurring dividend, reflect management confidence in long-term value creation and could drive higher earnings per share while strengthening shareholder returns.

Valuation

• The assumed bearish price target for PagSeguro Digital is $6.94, which represents two standard deviations below the consensus price target of $11.47. This valuation is based on what can be assumed as the expectations of PagSeguro Digital's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $14.5, and the most bearish reporting a price target of just $5.18.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be R$21.2 billion, earnings will come to R$2.1 billion, and it would be trading on a PE ratio of 5.9x, assuming you use a discount rate of 11.2%.
• Given the current share price of $8.61, the bearish analyst price target of $6.94 is 24.1% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.