Expanding Into Online And Credit Services Will Increase Future Client Engagement

Key Takeaways

• Diversification into online offerings and credit products, alongside a focus on MSMB, could drive broader client engagement and revenue growth.
  
• Share buybacks and financial expense optimization may enhance profitability and shareholder value, supporting stock valuation and earnings growth.
  
• Focus on unsecured lending and dependence on large merchants introduces financial risks, while market competition and rising costs could squeeze profitability and revenue.

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.

• The company's strategy to expand in the MSMB segment and diversify revenues beyond payments, such as increasing online offerings and cross-selling credit products, could drive future revenue and enhance earnings through broader client engagement.
  
• The rise in Total Payment Volume (TPV) by attracting profitable merchants with monetization potential in financial services suggests a pathway to increased revenue growth and improved net margins due to higher-value transactions.
  
• The expansion of the banking segment, with a focus on cash-in growth, client engagement, and offering secured credit products, shows potential for higher banking revenues and robust future earnings from increased interest income.
  
• The company's focus on financial expense optimization and reduction in funding costs aligns with improved future net margins and profitability, aided by a strong deposit franchise that reduces cost of funding.
  
• Continued execution of share buybacks indicates a commitment to returning value to shareholders, potentially driving EPS growth and supporting higher stock valuations.

PagSeguro Digital Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PagSeguro Digital's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.4% today to 12.7% in 3 years time.
• Analysts expect earnings to reach R$2.7 billion (and earnings per share of R$7.73) by about December 2027, up from R$2.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as R$2.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 2.0x on those 2027 earnings, down from 6.0x today. This future PE is lower than the current PE for the US Diversified Financial industry at 17.9x.
• Analysts expect the number of shares outstanding to grow by 3.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.1%, as per the Simply Wall St company report.

PagSeguro Digital Future Earnings Per Share Growth

Risks

• A focus on unsecured lending, while a potential growth area, presents higher risk especially if macroeconomic conditions worsen, potentially affecting net margins and profitability.
  
• The competitive landscape in the online and MSMB segments may compress pricing and profitability as the company seeks profitable merchants over market share, impacting revenue generation.
  
• Fluctuations and increases in the Brazilian interest rate (SELIC) could increase financial expenses significantly, thereby squeezing net income.
  
• Several initiatives involve costs in marketing, personnel, and expanding engagement, which could increase operational expenses and impact net margins if not matched with proportional revenue growth.
  
• Dependence on large merchants with R$1 million-plus in transactions monthly introduces concentration risk, and any shifts in this segment could lead to revenue volatility.

Valuation

• The analysts have a consensus price target of R$11.57 for PagSeguro Digital based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$16.94, and the most bearish reporting a price target of just R$5.54.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be R$20.8 billion, earnings will come to R$2.7 billion, and it would be trading on a PE ratio of 2.0x, assuming you use a discount rate of 11.1%.
• Given the current share price of R$6.22, the analyst's price target of R$11.57 is 46.2% higher.
• 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.