Insights

Why PagSeguro Cratered Today

What happened

Shares of Brazilian fintech PagSeguro Digital (NYSE: PAGS) plummeted today, down 19.2% as of 12:52 p.m. ET.

PagSeguro reported earnings this morning, and while the company continued to show strong top-line growth, its margins have compressed quite a bit. That’s because Brazil’s economy has seen really bad inflation and skyrocketing short-term rates, which affects PagSeguro’s cost base. With investors now focusing more on profitability and pricing power as interest rates rise, the result wasn’t what they had hoped for.

So what

At first glance, PagSeguro’s results didn’t look bad at all. After all, revenue rose 66% (in Brazilian Reals) on the back of 60% total payment volume growth. Furthermore, the payment processor has been steadily growing its PagBank offering, which takes deposits and lends out money to both its merchant clients and consumers. Deposits were up 124% and loans were up 166% during the first quarter. PagSeguro’s market share of the Brazilian payments space even increased from 8.9% to 10.6% over the past year.

So, what was the problem? Largely, it comes down to interest rates, or financial costs. If you think the U.S. has an inflation and interest rate problem, then you should see Brazil! Its central bank key rate, or short-term deposit rate, has risen from a low of 2% during the pandemic to a whopping 12.75% today, with most of that rise happening since last summer.

As a result, PagSeguro’s finance costs skyrocketed 1,300% over the past year, putting a squeeze on profits. Total non-GAAP (adjusted) net income only rose 14%, with adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in the payments segment only growing 20%, and PagBank actually reporting worsening EBITDA losses.  

While it’s still profitable overall, the margin compression seems to show PagSeguro can’t quite pass on all of its higher costs to its merchants, so it may lack pricing power to offset inflation.

Now what

While this is an ugly day for PagSeguro, it may be an opportunity for investors. After today’s plunge, the stock only trades around 13 times this year’s earnings estimates. While the macroeconomic environment is certainly adverse now, it may not always be that way.

Still, if one does invest, PagSeguro belongs in the high-risk, higher-upside part of your portfolio. Brazilian inflation relative to the U.S. dollar could hurt the value of PagSeguro’s profits for foreign investors; furthermore, Brazil has a consequential presidential election later this year, between the current far right administration and its leftist rival. The outcome could have unpredictable consequences for businesses in Brazil.

PagSeguro belongs on your watch list after its 67% plunge over the last 12 months. However, investors need to understand the Brazilian economic and political climate before diving in.

Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends PagSeguro Digital. The Motley Fool has a disclosure policy.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

  • This field is for validation purposes and should be left unchanged.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Free Share Allocation Reward Levels

STARTER

Class
$ 2,500 Deposit & Trade
  • REWARD^
  • 1 x Marathon Oil Corporation (NYSE:MRO)

ECONOMY

Basic
$ 5,000 Deposit & Trade
  • REWARD^
  • 1 x Pfizer Inc (NASDAQ:PFE)

ECONOMY

Standard
$ 10,000 Deposit & Trade
  • REWARD^
  • 1 x Amazon.com Inc (NASDAQ:AMZN)

ECONOMY

Plus
$ 25,000 Deposit & Trade
  • REWARD^
  • 2 x Apple Inc (NASDAQ:AAPL)
POPULAR

BUSINESS

Class
$ 50,000 Deposit & Trade
  • REWARD^
  • 4 x Apple Inc (NASDAQ:AAPL)

FIRST

Class
$ 150,000 Deposit & Trade
  • REWARD CHOICES^
  • 12 x Apple Inc (NASDAQ:AAPL)
  • 2 x Tesla (NASDAQ:TSLA)
^Please refer to the Free Share Promotion Terms and Conditions for details.

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;

To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.

An active and funded account with a positive trading balance is required to continue to have access to the tools;

Although the tools are available to you, Monex Securities may at it’s discretion disable access to the tools in the future;

Monex Securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

FREE AAPL, TSLA, AMZN, PFE or MRO Share(s)
REGISTER TO BE ELIGIBLE FOR FREE SHARES
TRAVEL ACROSS THE FINANCIAL WORLD
Act Fast - Promotion Ends In
Click Here To Get Started
FREE AAPL, TSLA, AMZN, PFE or MRO Share(s)
REGISTER TO BE ELIGIBLE FOR FREE SHARES
TRAVEL ACROSS THE FINANCIAL WORLD
Act Fast - Promotion Ends In
Click Here For More Info